Master limited partnerships (MLPs) and the corresponding exchange traded funds (ETFs) are among this year’s best-performing plays in the energy sector. For example, the Global X MLP ETF (NYSEArca: MLPA) and the Global X MLP & Energy Infrastructure ETF (NYSEARCA: MLPX) are building on strong first-half performances and are soaring again in July.
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.
A variety of factors are propping up MLPs and ETFs such as MLPA and MLPX this month.
“The Organization of the Petroleum Exporting Countries (OPEC) has preliminarily agreed to extend oil production cuts for another nine months, until March 2020,” said Global X in a recent note. “OPEC has also entered an agreement with Russia, a non-member, but an important outside ally, to secure its cooperation in the context of the extended production cuts. The decision comes on the back of weaker oil prices, trade tensions, and geopolitical issues.”
What’s Next for MLPs?
Due the domestic tilt of midstream MLPs, including those that dwell in MLPX, these companies are also insulated from currency shocks because most of their revenue is denominated in dollars. Additionally, MLPs are offering tantalizing dividend yields.
“The current yield on MLPs stands at 7.92%. MLP yields remained higher than the broad market benchmarks for High Yield Bonds (5.87%), Emerging Market Bonds (5.63%), Fixed Rate Preferreds (5.45%), and Investment Grade Bonds (3.30%),” according to Global X. “MLP yield spreads versus 10-year Treasuries currently stand at 5.82%, higher than the long-term average of 4.47%.”
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.
“The Enterprise Value to EBITDA ratio (EV-to-EBITDA), which seeks to provide more color on the valuations of MLPs, increased 1.6% last month. Since June 2018, the EV-to-EBITDA ratio has fallen by approximately -22%,” notes Global X.
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