The JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) and Alerian MLP ETF (NYSEArca: AMLP), two of the largest exchange traded products tracking master limited partnerships (MLPs), are up an average of 9.8% over the past month thanks to rebounding oil prices.
For income investors, the good news is that the rally MLPs and the relevant exchange traded funds may not be over. Some MLP market observers note that oil levels are sustainable at over $45 per barrel based on current costs. Meanwhile, Saudi Arabia’s costs are above $100 a barrel, which are being undercut by the nascent shale oil hydraulic fracturing or fracking industry where average costs are about $65 to $70 a barrel.
Consequently, with break-even costs at $45 per barrel due to roll costs, many traders are now looking at MLPs where payouts are sustainable.
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 have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.
“As tempting as the average MLP yield looks, however, we still advise caution. MLPs are cheap for good reason – the oil business is not what it used to be. At the very least, be selective when buying MLPs. Don’t reach for yield for yield’s sake only. Should investors be tempted to pick through the wreckage: buy liquid, buy larger-cap, buy quality, buy infrastructure,” according to a Wells Fargo note on MLPs posted by Amey Stone of Barron’s.
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