Even as oil prices decline, master limited partnerships and related exchange traded funds will continue to benefit from the rising production from U.S. oil drillers.
The ALPS Alerian MLP ETF (NYSEArca: AMLP) and JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) are the two largest MLP-related exchange traded products on the market, and both track the Alerian MLP Index. Year-to-date, AMJ is up 15.1% and AMLP is 11.9% higher. [Why Investors Should Take A Look at MLP ETFs]
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. In the U.S., we are experiencing an oil boom from new drilling techniques implemented in shale oil beds.
The big change has been that U.S. production of crude oil has been really ramping up over the past four years, because everybody has gotten more prolific about getting oil out of the ground,” Stewart Glickman, group head of energy research at S&P Capital IQ, said in an InvestmentNews article.
Glickman also argued that the logical play in the energy market now is through infrastructure and MLPs that contract to transport the commodity, no mater the per-barrel price.
“It doesn’t matter to the pipeline what the price of oil is, because they are getting fees for volume and clearly the volumes are high,” Glickman added.
Despite the falling oil prices, hydraulic fracturing shale drillers plan to expand production, which could mean that MLPs will experience more business ahead as the companies move around all the excess oil. [Oil ETFs: Shale Producers Continue Boosting Output]
Nevertheless, Quinn Kiley, a co-portfolio manager of Advisory Research Inc., warned that oil prices could fall to a point where production slows dramatically, which would weigh on MLPs.
Additionally, Glickman cautions that MLPs could also see some headwinds ahead in a rising rate environment since MLP yields would be less competitive and borrowing costs would rise. AMJ has a 4.56% 12-month yield and AMLP has a 6.0% 12-month yield.
“Most of the pipelines that are structured as MLPs are seen as yield plays, which means if interest rates go up the MLP yields might become less attractive to investors,” Glickman said. “Also, a lot of MLPs, because they are currently investing so much in pipeline construction, are highly levered, which means the expenses go up if interest rates go up.”
ALPS Alerian MLP ETF
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.