The universal assumption is that MLPs of all shapes and sizes are vulnerable to rising interest rates, although multiple factors must be taken into consideration. Those MLPs with high debt-to-equity ratios and large amounts of floating rate debt would be most vulnerable. Additionally, investors that want to remain in the MLP game if rates do rise should consider those names with exposure to multiple oil and natural gas producers.
That group would include some of the largest MLPs such as Enterprise Products (NYSE: EPD), Kinder Morgan (NYSE: KMP) and Plains All American (NYSE: PAA). Those three stocks combine for over 25% of the Alerian MLP ETF’s weight, according to issuer data.
Indeed, smaller, highly leveraged MLPs with exposure to floating rate debt that are dependent on just one or two energy companies for the bulk of their revenue could be punished if rates spike. There is also some precedent for MLPs performing well as rates rise.
“Master limited partnerships (MLPs) outperformed the S&P 500 during mid-2004 and mid-2007, the most recent period of rising interest rates in the past 20 years,” Lee Jackson reported for 24/7 Wall Street, citing Credit Suisse.
Alerian MLP ETF
ETF Trends editorial team contributed to this report. Tom Lydon’s clients own shares of AMLP.