Investors have yet to experience and feel the full effects of the 50 percent decline in oil prices, argued Richard Bernstein, CEO of Richard Bernstein Advisors.
“I think people should be much more worried about their energy investments than they are," Bernstein said Tuesday at a media briefing. “Everyone’s looking for bubbles, but nobody talked about the energy sector as being a bubble. This is about as close as you get to having a bubble,” he added.
Consider the oil rig count; while experts say the number is in decline, as you would expect in a bear market for oil, Bernstein pointed out that they are still at the same levels seen in 2010.
“You haven’t seen the secondary and tertiary effects of the energy sector and what that means for investment,” he says.
Another hazard? Energy-sector master limited partnerships, which often invest in pipelines and facilities, and have been extremely popular with yield-starved investors as they pay out most of their profits in dividends. "People are playing ostrich and do not want to believe the risks embedded in these companies," Bernstein said.
In 2009, MLPs had free cash flows of 5 percent. Now they have free cash flows of negative 5 percent, Bernstein said. “It means they’re requiring external capital to keep the whole thing going." And that external capital will increasingly be hard to come by.