Master Limited Partnership exchange traded funds rebounded Tuesday after a two-day plunge on a broad sell-off in energy-related assets in response to the Organization of Petroleum Exporting Countries’ decision to keep supply flowing.
The JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) rose 3.0% and the Alerian MLP ETF (NYSEArca: AMLP) gained 2.0% Tuesday. Year-to-date, AMJ is up 4.0% while AMLP gained 5.1%. Both investments products track the Alerian MLP Index.
Merrill Lynch’s commodity analysts argue that large MLPs will remain insulated from low oil prices as long as crude oil does not remain below $70 per barrel, reports Chris Lange for 24/7 Wall Street. The analysts project West Texas Intermediate crude oil could average $84 per barrel in 2015.
WTI crude oil futures are currently hovering around $67.4 per barrel.
The Merrill Lynch analysts believe that companies like Kinder Morgan (NYSE: KMI), Enterprise Products Partners (NYSE: EPD), Magellan Midstream (NYSE: MMP), Buckeye Partners (NYSE: PBL) and Plains All American (NYSE: PAA) could be partially insulated if oil prices remain low.
AMJ includes a significant tilt toward EPD 15.5%, along with Kinder Morgan Energy Partners L.P. (NYSE: KMP) 9.6%, PAA 6.7% and MMP 4.4%. Additionally, AMLP holds EPD 10.5%, PAA 7.6%, MMP 7.4% and BPL 6.0%.
Kinder Morgan Inc. completed its acquisitions of Kinder Morgan Management LLC (NYSE: KMR), Kinder Morgan Energy Partners L.P. and El Paso Pipeline Partners L.P. (NYSE: EPB) at the end of last month. [Changes Afoot for MLP ETFs as Kinder Morgan Deal Nears Closure]
Consequently, the Alerian MLP Index has replaced EPB and KMP with Martin Midstream Partners (NasdaqGS: MMLP) and Valero Energy Partners (NYSE: VLP). However, it appears that AMJ has yet to replace its Kinder Morgan exposure.
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 and shale oil drillers have stated that they are increasing production. [Oil ETFs: Shale Producers Continue Boosting Output]
Looking ahead, Merrill Lynch warns that supply chain disruptions are a key factor to potential growth concerns. Specifically, MLPs could lose key customers due to lower domestic crude oil supply, experience a sustained period of low natural gas prices and be hindered by hurricanes, which would all negatively affect volumes following through MLP pipelines.
JPMorgan Alerian MLP Index ETN
For more information on master limited partnerships, visit our MLPs category.