Currently, oil companies have been steadily increasing output in the U.S.. Morningstar analysts sees long-term growth in production on the prevalence of low-cost inventory.
“Greater U.S. energy production can be good for some MLPs because it means a greater need for new infrastructure,” Goldsborough said. “Because most MLPs collect fees for volumes, greater volumes typically result in greater cash flows for MLPs.”
However, traders did not differentiate the energy infrastructure MLPs from big energy names this time around, with AMJ down 23.0% and AMLP 16.5% lower so far this year. Goldsborough calculates that roughly one fourth of the industry’s cash flows are commodity-sensitive.
Potential MLP ETP investors should be aware the intricacies associated with the ETF or ETN structures. For instance, MLP ETFs like AMLP that hold more than 25% of their portfolio in MLPs are structured as C-Corporations in order to track an underlying MLP-related index. Due to the C-Corporation structure, they must pay corporate income tax on distributions before passing them to investors. Consequently, MLP ETFs may incur higher fees that would cut into overall performance.
MLP ETNs like AMJ are structured as an an unsecured debt instrument that replicates the return of the MLP index, the ETN vehicle is not subject to the double-taxation effects associated with a C-Corporation. ETNs, though, are subject to credit risk of the underwriting bank or issuer.
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.