Ron Hiram

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Professional Experience

CEO at Cellnet Solutions Ltd., Feb '08 - Feb '10
Managing Partner at Federmann Enterprises (Eurofund), Sep '02 - Feb '08
Partner at TeleSoft Partners, Dec '00 - Jul '02
Managing Director at Lehman Brothers, May '81 - Mar '94
Partner at Aoros Fund Management, Mar '94 - Nov '00

Education

MBA at Columbia University, Aug '79 - May '81

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  • commented 1/31/12
  • tags: AMZN
  • Increasing correlation between MLP returns and oil price

    [color=#0000ff]prior articles[/color] I looked at the sustainability of distributable cash flows with respect to a number of MLPs (BPL, EPD, EPB, ETP, NGLS, NRGY, PAA and WPZ). In this article I focus on something quite different - the relationship between MLP returns and oil prices.



    Now that the earnings season is in full swing, I will be updating my reports on the sustainability of distributable cash flows with 4Q11 data and will also apply the same analytical method to additional MLPs. However, important as it is, distributable cash flow is but one factor and a serious analysis of the risks and potential rewards investments in MLPs should be multi-faceted. It is critical to evaluate the degree to which an investment in MLPs is correlated to other portfolio assets and to understand risks inherent in holding MLPs as part of a diversified investment portfolio.

    It is a common perception that energy MLPs have limited commodity exposure. Intuitively it seems to make sense because energy MLP are in the business of transporting and/or storing crude oil and gas. For the most part, they are not engaged in exploration or production and therefore their returns should not be too closely correlated with prices of the commodities they carry over their pipelines. Energy MLPs are generally classified in the lower-risk segment of the energy chain and are perceived to exhibit low correlation with other asset classes, including commodities such as natural gas, crude oil, and various equity and fixed income securities.

    Looking at the relationship between MLP returns and oil prices, it appears that prior to 2008 the two were indeed largely uncorrelated:



    In this chart, Bbl = the month-end Cushing, OK Crude Oil Future Contract price ($ per barrel) reported by the U.S. Energy Information Administration. AMZX is the Alerian MLP Index, a composite of the 50 most prominent energy MLPs calculated using a float-adjusted, capitalization-weighted methodology and disseminated real-time on a price-return basis (NYSE: AMZ) and on a total-return basis (NYSE: AMZX). I derived the chart by indexing the price per barrel as of December 31, 2008 (the actual price was $42.04) to 100 and adjusting all prior prices proportionately. Likewise, I set the AMZX to 100 as of December 31, 2008 (the actual level was 428.12) and adjusted all prior month-end prices proportionately.

    While the perception of low correlation with oil prices persists, reality has markedly changed over the last few years. Recent data now point to a very significant correlation between MLP returns and oil prices:

    I derived the chart by indexing the price per barrel as of December 31, 2011 (the actual price was $98.58) to 100 and adjusted all prior prices proportionately. Likewise, I set the AMZX to 100 as of December 31, 2011 (the actual level was 1168.41) and adjusted all prior month-end prices proportionately.

    [color=#0000ff]Financial Crisis Inquiry Commission[/color], reached seismic proportions in September 2008 with the failure of Lehman Brothers and the impending collapse of the insurance giant American International Group (AIG).

    [color=#0000ff]more closely mirror[/color] the price of crude oilthan of natural gas prices. I do not have a full explanation for this phenomenon and do not know whether it is temporary in nature. But I do not dismiss it lightly and believe it should be carefully considered and taken into account in any attempt to build a balanced investment portfolio. If the recent pattern of close correlation continues, there appears to be a significant risk that a decline in oil will be accompanied by a decline in the per unit prices of energy MLPs. Investors with significant amounts invested in MLPs should evaluate their exposure to oil price fluctuations with that in mind.



    T[color=#333333; font-family: 'Helvetica','sans-serif'; font-size: 10pt; mso-bidi-theme-font: minor-bidi; mso-bidi-font-family: Arial]his article was submitted by Ron Hiram of Wise Analysis[/color] using our[color=#0066cc] Trefis Contributors[/color] tool. [ less... ]

    Increasing correlation between MLP returns and oil price <span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;">[color=#0000ff]prior articles[/color][/url]<font size="3"> I looked at the sustainability of distributable cash flows with respect to a number of MLPs (BPL, EPD, EPB, ETP, NGLS, NRGY, PAA and WPZ). In this article I focus on something quite different - the relationship between MLP returns and oil prices. </font></span> <font size="3" face="Times New Roman"> </font> <p class="MsoNormal" style="margin: 0in 0in 0pt; line-height: normal;"><span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;"><font size="3">Now that the earnings season is in full swing, I will be updating my reports on the sustainability of distributable cash flows with 4Q11 data and will also apply the same analytical method to additional MLPs. However, important as it is, distributable cash flow is but one factor and a serious analysis of the risks and potential rewards investments in MLPs should be multi-faceted. It is critical to evaluate the degree to which an investment in MLPs is correlated to other portfolio assets and to understand risks inherent in holding MLPs as part of a diversified investment portfolio. </font></span> <span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;"><font size="3">It is a common perception that energy MLPs have limited commodity exposure. </font></span><span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;"><font size="3">Intuitively it seems to make sense because energy MLP are in the business of transporting and/or storing crude oil and gas. For the most part, they are not engaged in exploration or production and therefore their returns should not be too closely correlated with prices of the commodities they carry over their pipelines. Energy MLPs are generally classified in the lower-risk segment of the energy chain and are perceived to exhibit low correlation with other asset classes, including commodities such as natural gas, crude oil, and various equity and fixed income securities. </font></span> <span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;"><font size="3">Looking at the relationship between MLP returns and oil prices, it appears that prior to 2008 the two were indeed largely uncorrelated: </font></span> <font size="3" face="Times New Roman"> </font> <p class="MsoNormal" style="margin: 0in 0in 0pt; line-height: normal; mso-layout-grid-align: none;"><span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;"><font size="3">In this chart, Bbl = the month-end Cushing, OK Crude Oil Future Contract price ($ per barrel) reported by the U.S. Energy Information Administration. AMZX is the Alerian MLP Index, a composite of the 50 most prominent energy MLPs calculated using a float-adjusted, capitalization-weighted methodology and disseminated real-time on a price-return basis (NYSE: AMZ) and on a total-return basis (NYSE: AMZX). I derived the chart by indexing the price per barrel as of December 31, 2008 (the actual price was $42.04) to 100 and adjusting all prior prices proportionately. Likewise, I set the AMZX to 100 as of December 31, 2008 (the actual level was 428.12) and adjusted all prior month-end prices proportionately. </font></span> <span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;"><font size="3">While the perception of low correlation with oil prices persists, reality has markedly changed over the last few years. Recent data now point to a very significant correlation between MLP returns and oil prices: </font></span> <span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;"><font size="3">I derived the chart by indexing the price per barrel as of December 31, 2011 (the actual price was $98.58) to 100 and adjusted all prior prices proportionately. Likewise, I set the AMZX to 100 as of December 31, 2011 (the actual level was 1168.41) and adjusted all prior month-end prices proportionately. </font></span> <span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;">[color=#0000ff]Financial Crisis Inquiry Commission[/color][/url]<font size="3">, reached seismic proportions in September 2008 with the failure of Lehman Brothers and the impending collapse of the insurance giant American International Group (AIG). </font></span> [color=#0000ff]more closely mirror[/color][/url] the price of crude oil</span><span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;">than of </span><span style="font-family: 'Times New Roman','serif'; font-size: 12pt; mso-fareast-font-family: 'Times New Roman';">natural gas prices. </span><span style="font-family: 'Times New Roman','serif'; mso-ascii-theme-font: major-bidi; mso-hansi-theme-font: major-bidi; mso-bidi-theme-font: major-bidi;">I do not have a full explanation for this phenomenon and do not know whether it is temporary in nature. But I do not dismiss it lightly and believe it should be carefully considered and taken into account in any attempt to build a balanced investment portfolio. If the recent pattern of close correlation continues, there appears to be a significant risk that a decline in oil will be accompanied by a decline in the per unit prices of energy MLPs. Investors with significant amounts invested in MLPs should evaluate their exposure to oil price fluctuations with that in mind. </span></font> <font size="3" face="Times New Roman">T</font>[color=#333333; font-family: 'Helvetica','sans-serif'; font-size: 10pt; mso-bidi-theme-font: minor-bidi; mso-bidi-font-family: Arial]his article was submitted by Ron Hiram of <span style="color: #0066cc;">Wise Analysis[/color] using our[color=#0066cc] Trefis Contributors[/color] tool.</span>



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