A Perfect Trade In A Very Volatile Oil Market

This week’s chaos in the energy markets, with an expiring WTI futures contract hitting the previously unthinkable level of negative $40 a barrel, has left many people who follow, trade, and invest in energy dazed and confused. It seems that no matter how many times you hear others say or tell people yourself that energy investing is, due to the volatile nature of the underlying commodities, a risky undertaking, it comes as a big shock to us all when that volatility surfaces to that extent.

As I have said many times before, though, with volatility comes opportunity, and logically, the greater the volatility, the greater the opportunities. Bear that in mind before you label the trade idea that I am discussing this week as “bat$&?! crazy”

The idea is to buy Global Partners (GLP). The crazy part is that it is an MLP involved in delivering fuel and supplies to, and owning and operating gas stations and convenience stores in the North-Eastern part of the country. I know, in the U.S. right now, MPG stands for “months per gallon”, not “miles per gallon”, but there is some kind of method to my madness.

As you can see from the above chart, although GLP has bounced significantly off its lows, there is still around 100% upside to the stock should things return to “normal” within a reasonable time span. In this case though, while capital appreciation like that would be a big bonus, it is not necessarily the point of the trade.

For a lot of energy investors, the appeal of the sector is income. In an environment where the 10-Year U.S. Treasury Note is yielding just over half a percent, the big yields available in some energy stocks are even more attractive than usual. So, GLP’s twelve-month trailing yield of over nineteen percent looks pretty tempting.

Let’s not kid ourselves though, with virtually nobody buying gas and with convenience stores seen by many people simply as virus transfer stations, that yield has to be in serious danger. The risk of a payout cut, however, may be worth taking in this case.

Firstly because of the size of the yield itself. At nineteen percent, you don’t need to invest a significant percentage of your portfolio to make quite a difference to your overall returns, which keeps the risk under some degree of control. And even if the payout is cut, say, in half, nine and a half percent would still qualify as “juicy” with rates where they are. In that case, you might have missed out on the opportunity to buy cheaper, but nine and a half percent is at least some compensation for that.

There are even reasons to believe that if GLP does cut their payout, the effect on the stock won’t be as disastrous as some might anticipate.

Individual investors aren’t the only ones desperate for yield in this environment. There are big funds that are required to generate some sort of income from their investments, and they are struggling too. Even a tiny percentage of one of those funds would represent a significant investment in something like GLP, with a current market cap of less than $350 million, so there is a good chance of decent support even should a reduced payout be announced.

There is a slight risk of total loss as well, but the structure of an MLP and a current ratio of over 1.0 make that less likely than you might imagine in the short term.

So, what we have is a stock that can survive in the short-term, has a good chance of support from big players and is currently yielding a whopping nineteen percent annually. Maybe I’m not so crazy after all…