For those who want to capture the oil boom in North America but are still wary about geopolitical risks and volatility in commodity prices, master limited partnership exchange traded funds can provide a more stable alternative.
CNBC’s Mad Money Jim Cramer argues that companies like Magellan Midstream Partners (NYSE: MMP) are a better way to capture the growth in the energy sector since MLP revenue do not go hand-in-hand with the spot price of oil, reports Lee Brodie for CNBC.
MMP account for large positions in many MLP-related ETFs. For instance, the Alerian MP ETF (NYSEArca: AMLP), the largest MLP ETF with over $9 billion in assets, has a 6.7% position in MMP, and the UBS ETRACS Alerian MLP Infrastructure ETN (NYSEArca: MLPI) holds a 7.2% weight in Magellan. AMLP is up 9.7% and MLPI is up 13.9% year-to-date. [MLP ETFs Surge as Risk-Off Energy Investments Gain Favor]
As a pipeline operator, these companies generate the majority of their businesses from charging fees to access their pipelines. Essentially, these MLPs act as the toll booths in the oil highway.
“The bulk of Magellan’s business comes from transporting refined products like gasoline and diesel,” Cramer said. “They have 9,500 miles of refined product pipeline, along with 54 terminals and 42 million barrels of storage.”
As a partnership, MLPs act as a pass-through entity where the company’s income or losses pass through to individual owners of the partnership. Consequently, many investors have enjoyed attractive yields. For instance, AMLP has a 5.8% 12-month yield and MLPI has a 4.09% 12-month yield. Additionally, some companies are raising their payouts.
“Magellan plans on increasing its payout by 20 percent this year and raising it another 15 percent next year,” Cramer said. “Magellan has a long history of raising its distribution, something they’ve done for the last 48 consecutive quarters.”
Even if oil prices decline, MLPs still have negotiating power as the supply and demand fundamentals remain in the industry’s favor.
“We have a serious shortage of pipeline capacity in this country,” Cramer said.
There are also plenty of other MLP and oil infrastructure-related ETF options on the market. The First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP) has a 3.0% yield. The Yorkville High Income MLP ETF (NYSEArca: YMLP) shows a 8.6% yield. The Global X MLP & Energy Infrastructure ETF (NYSEArca: MLPX) has a 2.32% 30-day SEC yield. [A Rapid Ascent for This MLP ETF]
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.