Rebounding along with rising crude oil prices, master limited partnerships and related exchange traded funds are once again looking like an attractive yield-generating alternative.
The JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) and the ALPS Alerian MLP ETF (NYSEArca: AMLP), the two largest MLP-related exchange traded products, are now up 16.9% and 15.3% year-to-date, respectively, after West Texas Intermediate crude oil prices surged from $26 per barrel in February to its current $53.0 per barrel.
MLPs also offer attractive yields for investors. For instance, AMJ has a 6.87% 12-month yield and AMLP shows a 8.28% 12-month yield.
While MLPs have slightly lower correlations to crude oil prices, the space still reflected the distress in the broader energy sector in response to plunging prices.
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. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.
MLPs don’t make their money based on oil or gas prices. 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.
With energy prices stabilizing in response to the Organization of Petroleum Exporting Countries’ plans to cut oil production and President-elect Donald Trump fueling economic growth and taking a friendlier stance on fossil fuel, the MLP industry’s outlook looks stronger.