Master limited partnerships and sector-related exchange traded funds jumped Friday as more investors look to a beaten down area of the market for potential value.
On Friday, the InfraCap MLP ETF (NYSEArca: AMZA) jumped 6.1%, ALPS Alerian MLP ETF (NYSEArca: AMLP) increased 4.9% and JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) advanced 4.6%.
Master limited partnerships took a big hit in 2018. MLPs, as measured by the benchmark Alerian MLP Index, ended December down 9.4% on a price basis and once distributions are considered, Brian Watson, Director of Research and a senior portfolio manager for Oppenheimer SteelPath MLP Alpha Fund (MLPAX), said in a research note.
Furthermore, the Alerian MLP Index was down 19.0% on a price basis for the year or exhibited a 12.4% total return loss, compared to the S&P 500 Index’s 6.2% and 4.4% price and total return losses, respectively.
On the upside, the retreat in prices has helped prop up yields. MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, widened by 95 basis points over December and ended the period at 630 bps. In comparison, the trailing five-year average spread was 493 bps and the average spread since 2000 was 370 bps.
The pullback in MLPs has also made the sector appear cheap on a historical basis.
“The late-year market pullback pushed midstream valuations to levels not seen since the Great Recession of 2008 and 2009. At month-end the group’s median price-to-distributable cash flow (P/DCF) multiple was 7.3x, compared to the long-term average of 11.1x,” Watson said.
The sentiment is also mirrored by other market analysts. For example, Goldman Sachs analyst Michael Lapidis, recently pointed out that the sector now yields an average 8%, while fundamentals are picking up, and the stocks look inexpensive, Barron’s reports. If investors were to account for the three factors together, Lapidis argued that midstream energy stocks could return 33% in 2019 after dividends.
For more information on master limited partnerships, visit our MLPs category.