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.
“The table is set for the energy sector. A lot of uncertainties are off the table,” Rob Thummel, portfolio manager of Tortoise Capital Advisors in Leawood, told U.S. News. “Prices have stabilized and are probably range bound. Fifty to 60 dollars (for crude oil) is a sweet spot for MLPs and any other energy stock. Producers can earn an adequate return at that level and consumer demand will remain strong. For MLPs, demand for the commodity is key.”
Demand for oil in the U.S. could also rise along with a strengthening economy. Trump has promised a number of expansionary economic policies, such as increased fiscal spending and corporate tax cuts, that could fuel growth. As demand for raw materials rises in an expanding economy, MLPs may enjoy greater oil traffic through their pipelines.
“There are two reasons for higher MLP prices. One, the U.S. is the lowest-cost marginal producer in the world. … Second, we no longer have a president whose primary energy policy is to eliminate fossil fuels,” Jay Hatfield, portfolio manager at InfraCap MLP ETF (NYSEArca: AMZA), told U.S. News.
Moreover, U.S. production looks more stable and could even pick up in response to rising oil prices, which would further support MLPs as oil is transported from various areas in the U.S.
“What that creates is a relatively positive fundamental environment for MLPs,” Darin Turner, managing director and portfolio manager for Invesco Real Estate, told U.S. news. “We’re almost doing a 180 from where we were 18 months ago, when everybody thought U.S. production was never going to be as high as it was back in 2014 and ’15.”
For more information on master limited partnerships, visit our MLPs category.