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SRV And SRF: Playing Games In Closed-End Funds

Summary Cushing Royalty & Income Fund and Cushing MLP Total Return Fund have both gone through a reverse stock split. The press release suggests it was done for shareholders. That’s sort of true, but you shouldn’t thank the CEFs for it. On September 14th, the Cushing Royalty & Income Fund (NYSE: SRF ) (now known as the Cushing Energy Income Fund ) and the Cushing MLP Total Return Fund (NYSE: SRV ) effected 1 for 5 reverse splits. That changes very little for shareholders except the price of the closed-end funds, or CEFs. That said, a higher price is better in some ways, but you still shouldn’t be thanking the funds for this move. What changes? The first thing to keep in mind with any stock split is that it does nothing to a shareholder’s ownership in a company. Your proportional ownership remains unchanged. So, in many ways, a stock split is mostly about theatrics. But that can be important. For example, some companies split their stocks two for one when the stock gets to around $100 a share. The idea being that people are more likely to buy shares in a company with shares selling at $50 than one with shares trading hands at twice that level. Maybe, maybe not… but clearly it’s about the show since the split would just turn a $100 share into two $50 shares. Reverse splits like the ones SRF and SRV just did are a bit trickier. Sometimes a company’s shares are trading at such low levels that they risk being delisted by their exchange. In that case, the split has a very real purpose, but that’s normally only an issue that impacts true penny stocks. In other cases, the move is just a show. Investors often avoid low-priced companies because of a concern over the risk of owning a company with a low share price. Institutional accounts, for example, often have minimum share price limitations. That’s not an unfounded fear, but it isn’t always realistic either. So companies with relatively low share prices will sometimes do a reverse split to prop up the price to attract more investors. Reversing the above example, a company that did a one for two reverse split would simply take two $50 shares and turn them into one $100 share. An Investor’s stake in the company isn’t altered, just the share price and the number of shares he or she owns. What about SRF and SRV? So a split doesn’t really change anything, even though there may be good reasons to do them. Are there bad reasons? The answer is yes. The reverse split at SRF and SRV has been billed as: The intent of the reverse share split is to potentially increase the Fund’s market price per common share and trading volume, thereby reducing the per share transaction costs associated with buying or selling the Fund’s common shares in the secondary market. Sure, with a higher share price, it may be easier to trade SRF and SRV. But that’s not likely the reason for the split. Although neither was at the point where you’d worry about a delisting, both were at the point where investors could reasonably be scared off by the low price. So the reverse split makes both SRF and SRV appear a bit more respectable. The problem is that both have made material use of return of capital in recent years. In fact, SRF has supported its distribution with nothing but return of capital since its initial public offering in early 2011. The net asset value, or NAV, fell from roughly $23 a share at the IPO to $5.60 at the end of May. By the time of the split, the NAV had fallen even further, falling into the $3.80 a share range. That’s brutal, particularly for a fund that’s only provided return of capital to its shareholders. The fund’s goal , by the way, is to seek a high total return with an emphasis on current income. I’m hard pressed to see how it’s lived up to that objective. SRV has done a little better, with its NAV falling to the $3.75 a share range before the reverse split from around $5.75 or so in late 2009. However, the high in the period was an NAV of around $8. So for many investors the NAV drop has been pretty harsh. And return of capital has been a big part of the distribution, representing roughly 60% of the disbursement between December of 2009 and May of 2015. That’s not a good number, but, to be fair, not nearly as bad SRF’s 100%. No dividend cuts, yet… At this point, neither fund has enacted a distribution cut. But with SRF offering a yield of over 15% and so much return of capital, I wouldn’t expect the payment to hold up. And if it does, then the split was cosmetic in that it helps to hide the fact that the fund has basically been self-liquidating since the day it came public. Based on the numbers, I just find it really hard to buy into the “ease of trading” logic the fund is using to justify the reverse stock split. SRV’s reverse split doesn’t look quite as bad, since the CEF yields around half as much as SRF. That could actually be sustainable, but only if the oil and gas sector on which the fund focuses turns around. If that doesn’t happen soon, the note in the split announcement highlighting that the September distribution was expected to be all return of capital is a not-so-subtle problem. And it could just get worse if low oil and gas prices force more dividend and distribution cuts in the oil and gas sector from which SRV generates its income. So SRV will be “easier to trade” too. But bumping up the share price via a reverse stock split still looks more like an attempt to paper over the trouble brewing with the distribution and NAV. Not where you want to be SRF and SRV are focused on a rough area of the market. If you are a contrarian that might interest you. But the high levels of return of capital for funds that have seen their NAVs fall dramatically should be a big concern. And the reverse stock split does nothing to change that dynamic – unless potentially large distribution cuts are made. The reverse split will probably make it easier to trade SRF and SRV, as the CEFs suggest. However, the splits look more like an attempt to cover deeper problems to me. I would avoid this pair. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Cushing MLP Total Return Fund: A Lesson For CEF Investors

Summary CEF investors are often attracted by the high yields in this space. SRV’s anomalously high yield and premium provided a ripe recipe for disaster. This article identifies three warning signals that investors could have heeded before the devastating event. The date is Dec. 22nd, 2014. With oil prices collapsing around you, you decide that now would be a good time to dip your toes in an MLP close-ended fund [CEF]. You read Stanford Chemist’s just-published article entitled ” Benchmarking The Performance Of MLP CEFs: Is Active Management Worth It? “, where he recommended, among five MLP CEFs yielding 5.43% to 6.85%, the Tortoise Energy Infrastructure Corporation ( TYG ) due to its strong historical total return and outperformance vs. the benchmark Alerian MLP ETF ( AMLP ). But the 5.43% yield of TYG and the 6.25% yield of AMLP are a bit low for your tastes. You decide to invest in the Cushing MLP Total Return Fund ( SRV ) with a whopping 14.02% yield , more than double that of the other two funds. With twice the yield, you might expect twice the return, right? Fast-forward to today. You have lost half of your investment. The following chart shows the total return performance of SRV, TYG and AMLP since Dec. 2014. SRV Total Return Price data by YCharts What happened to SRV? As with some other high-profile CEFs profiled recently, what transpired with SRV in early 2015 was a distribution cut that triggered a massive collapse in premium/discount value. As can be seen from the chart below (source: CEFConnect ), SRV slashed its quarterly distribution by 68%, from $0.2250 to $0.0730 in 2015. Amusingly, after paying one quarter of its reduced distribution, SRV cut its distribution again by 26%, while simultaneously changing to a monthly distribution policy (perhaps to make the second distribution cut less obvious!). Taken together, the overall change from a distribution of $0.2250/quarter to $0.0180/month represented a 84% reduction for SRV holders. (click to enlarge) The distribution cut was accompanied by a massive reduction in premium/discount value, from some +30% to -10%, as can be seen from the chart below. This explains the severe underperformance of SRV vs. TYG and AMLP since Dec. 2014. (click to enlarge) Obviously, hindsight is always 20/20. But I believe that there were some warning signs that SRV investors could have heeded before the disastrous event. Lesson #1: Consider historical performance While historical performance is no guarantee of future results, the past return of a CEF can give an indication of the management’s competency in running the fund. The 3-year total return to Dec. 2014 (the hypothetical start date of this exercise) shows that even before the distribution cut had occurred, SRV had been severely underperforming TYG and AMLP on a total return basis. SRV Total Return Price data by YCharts On a price-only basis, the underperformance of SRV becomes even more visually striking. SRV data by YCharts The above charts indicate that the high distribution paid out by SRV has prevented it from growing its NAV, despite the bull market in MLPs. Even when total returns are considered, SRV still lagged TYG and AMLP in the three years to Dec. 2014. Lesson #2: Premium/discount matters! As investors in the Pioneer High Income Trust (NYSE: PHT ) (see here for my previous article warning of PHT’s expanding premium) and more recently, the PIMCO High Income Fund (NYSE: PHK ), have found out , a high starting premium simply increases the amount that a fund can fall when adversity strikes. On Dec. 22nd, 2014, SRV’s premium/discount had stretched to a massive +28.4%. In comparison, TYG’s premium/discount was -6.1% at the time. The following chart shows the 3-year premium/discount profiles for SRV and TYG. (click to enlarge) The chart above shows that in the two years leading to Dec. 2014, SRV’s premium/discount expanded from around +15% to over +30%. On the other hand, TYG’s premium/discount declined from +15% to around -10% over the same time period. Does it make any sense to you that the perennial underperformer SRV was immune to the MLP sell-off that began in the summer of 2014, while the benchmark-beating TYG was not? No, it doesn’t make any sense to me either. In fact, SRV’s premium continued to expand even while the oil crash was already well underway. My only explanation for this was that retail investors were enamored with SRV’s high yield and pushed up its market price relative to its NAV. CEF expert and Seeking Alpha contributor Douglas Albo frequently laments the “Insanity of CEF Investors.” I believe that this example qualifies. Lesson #3: Beware of yields that seem too good to be true On Dec. 22, 2014, SRV yielded 14.02% with a premium/discount of +28.4%, meaning that its yield on NAV was even greater, at 18.00% (!). Meanwhile, TYG yielded 5.43% with a premium/discount of -6.1%, giving a NAV yield of 5.10%. Given that both funds employ similar leverage (around 30%), and are investing in essentially the same universe, how can SRV be yielding more than three times on its NAV compared to TYG? It just doesn’t make any sense. Simply put, SRV’s yield was way too good to be true. Summary I believe that there were several warnings signs that could have allowed investors to avoid SRV before the calamitous distribution cut in early 2015. These were [i] a poor historical performance, [ii] a rising premium (while other and better funds in the same category witnessed premium contraction), [iii] a yield that seemed way too good to be true. My main regret is not being able to identify this short opportunity for readers, and/or warn existing holders to exit the fund beforehand. Nevertheless, I hope that this article will help investors pick out similar warning signs in their existing or potential CEF investments to allow them to take action earlier. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Using Closed-End Funds To Play The Oil Price Recovery Could Hike Your Profits

Few, if any analysts saw the crude oil price drop coming. Most TV talking heads won’t see the oil price turnaround. Closed-End Funds Could Add 10% to 15% to Your Crude Turnaround Profits. Energy Share Prices Down Big Time Over the last year or so, crude oil prices have tumbled from around $100 per barrel down to the low $40 range. Consequently, the share prices of not only oil exploration and production companies, but everything else even remotely connected to the energy industry, have followed crude oil prices down. Nobody Saw Price Drop Coming Many analysts are predicting that oil prices could touch $30 per barrel before they bottom out. But the fact is, a year ago, few, if any, saw the price drop coming, and only two or three months ago they were forecasting that prices would stabilize in the $50 to $70 per barrel range. Thus, it is equally unlikely that many of the talking heads that you see on TV will predict the turnaround before it actually happens. Closed-End Funds Will Hype Profits I’ll leave it up to you to determine the timing. But closed-end funds should be your vehicle of choice, when and if you do decide to get back into energy. Here’s why. Closed-end funds are similar to conventional (open-end) mutual funds, but with one major difference. Rather than selling and redeeming shares as needed, closed-end funds sell a fixed number of shares when launched. After that, the fund trades just like a stock. Buyers purchase from existing shareholders, and shareholders must find a buyer when they sell. Because they create and redeem shares as needed, open-end funds always trade at their net asset value (NAV), which is the per share value of the fund’s assets. But, that’s not the case for closed-end funds. Because their share prices reflect the balance of supply and demand, they typically trade either above (premium) or below (discount) their NAVs. They trade at premiums when their market sector is in favor with most market players and at discounts when it isn’t. Currently, as you might imagine, most energy-focused closed-end funds, which in normal markets trade more or less at their NAVs, are trading at 15% or so discounts. That creates an unusual profit opportunity that isn’t available if you buy individual energy common stocks, or even with ETFs, which always trade close to their net asset values. For instance, say that you purchase an energy-focused fund trading at a 15% discount, and then crude oil prices start moving up. If the market believes that a long-term price recovery is at hand, the energy sector should move back into favor, and energy fund discounts to NAV would shrink or disappear altogether. Thus, besides for the fund share price gains resulting from the share price appreciation of its holdings, the shrinking discount would move fund share prices up another 10% to 15%. Here are two funds that you could consider if you want to follow this strategy. The first is a relatively conservative play and the second is more of a walk on the wild side. Kayne Anderson Energy (NYSE: KYE ) Holds mostly oil and natural gas pipelines, which are currently out of favor, but should be profitable regardless of whether oil and gas prices move back up or not. KYE is currently trading at a 16% discount to NAV compared to a small premium or discount (0-5 percent) during normal times. KYE is paying a $0.485 per share quarterly dividend, which equates to a 12% yield ($16.20 recent price). Cushing Royalty & Income (NYSE: SRF ) Holds oil producers, energy pipeline operators, oil drillers, etc., but it overweights small-cap oil producers that have the most to gain should oil prices spring back up, and the most to lose if they don’t. It’s trading at a 17% discount to its NAV versus a small (e.g. 3 percent) premium during normal years. It’s paying a $0.039 per share monthly dividend, which equates to a 13% yield based on its $3.60 recent share price. However, that dividend could disappear should oil prices drop to $30 and stay there. I don’t have any special ability to predict oil prices. Use these tools at your own discretion. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.