In recent years, global oil and gas prices have sharply dropped. These declining prices have a negative impact on the revenues of offshore oil and gas companies. This is because the revenues of companies in this industry correlate with global energy prices and are susceptible to changes in global gas prices and thereby make them risky investment products. On average, oil and gas companies are twice as volatile as diversified portfolios of stock. When there is a sharp decline in gas prices, the companies’ earnings will also sharply drop which will result in investors losing their money. Investors can then become exposed to oil and gas investments through unique companies’ names such as: Legacy Reserves, Navios Maritime Partners, Magellan Midstream Partners LP, and Enterprise Products Partners LP.
Overconcentration in Oil and Gas investments can expose your entire portfolio to significant losses.
The most common form of investment in oil and gas companies come in the form of Master Limited Partnerships (MLPs). MLPs are often exchange-traded investments which are publicly traded and derive at least 90% of their income from certain activities related to real estate, natural resources, and commodities. These MLPs are pass-through entities which mean that they do not pay taxes at the corporate level, rather, they distribute a majority of their cash flows to investors. When you invest in an MLP, you become a limited partner in the company. This allows for distributions from the profits generated by the MLP. Oil and gas MLPs can be an attractive investment tool for individuals interested in an income-producing investment product. However, the issue arises when individuals have an overconcentration of oil and gas investments in their portfolio. This overconcentration can expose your entire portfolio to significant losses. Experts vary on a “healthy” amount of oil and gas, but a safe estimate is that one should not have over 5% of their portfolio in oil and gas products because of their volatility and susceptibility to global gas prices.
What if you are overconcentrated in volatile oil and gas products and you happen to lose a significant amount of money? Your broker has a duty to only recommend investment products that are suitable to your investment profile. Your investment profile factors your age, investment experience, risk tolerance, and investment objectives. In the event you find yourself overconcentrated in oil & gas products and lose a significant amount of money, you may be able to sue your broker for breaching his or her duty to recommend suitable investments. If your broker suggests a certain investment product for you, and you accept it, the broker can still be liable for suggesting a bad investment for you.
Sean M. Sweeney is a shareholder at Halling and Cayo, a full service law firm in Milwaukee, WI and the head of its Securities Litigation team.
He represents individual and institutional investors in FINRA arbitration and court nationwide. He recovers investment losses from fraud or breach of duty from their broker-dealer.
Contact him at (414) 755-5020 or via e-mail at SMS@hallingcayo.com to see if he can help recover your funds.