Master limited partnerships and related exchange traded funds have surged back this month and are hovering around their short-term trend lines as investors revisit the battered yield-generating asset. However, there are still headwinds that could keep the sector pressured.
Since the September 29 low, both the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) and Alerian MLP ETF (NYSEArca: AMLP) surged about 20%. The two MLP ETPs are bouncing around their short-term, 50-day simple moving average. [Here’s What’s Fueling The MLP ETFs Rally]
The broad market recovery, rebound in energy prices and renewed interest in yield-generating assets all helped lift MLPs – AMJ has a 7.64% 12-month yield and AMLP has a 9.43% 12-month yield.
However, MLP investors should not completely write off the potential risks that the sector faces, such as the Federal Reserve’s eventual interest rate hike.
“Rising interest rates, investors fear, could result in a greater cost of capital for MLPs and potentially lower distributions,” warned Robert Goldsborough, an equity strategies analyst for Morningstar.
Moreover, while MLP ETPs are seen as being more insulated than energy funds during periods of oil price volatility, the past year has shown that MLPs are not totally immune to the swings.
Unlike other energy sector stocks, MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs act more like energy toll roads. MLPs also operate under very long-term contracts, so any temporary short-term changes in oil or gas typically have little to no effect on revenue streams.