With oil prices still in the doldrums, showing nary a response to recent supply cut news, master limited partnerships and ETFs such as the ALPS Alerian MLP ETF (NYSEArca: AMLP) continue scuffling.

Past performance isn’t guaranteed to repeat, but it’s worth noting the history of the Alerian MLP Infrastructure Index (AMZI) – AMLP’s underlying benchmark – particularly when that index experiences large drawdowns.

“In the eight occurrences when the AMZI has fallen by more than 15% on a total-return basis, the average forward three-month total return is 15.4%, and returns have been positive 75% of the time,” said Alerian analyst Stacey Morris in a recent note. “The average one-year total return has been 26.3%, and the three-year return has averaged 25.8%. Forward one-year returns have been positive six out of seven times (85.7%), and forward three-year returns have been positive four out of five times (80%).”

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.

Assessing AMLP

“Many investors have looked back to 2014-2016 as a reference for today’s environment given that WTI oil prices bottomed at $26/bbl in February 2016,” notes Morris. “In contrast to 2020, there was a slow grind lower from oil’s relative peak in the summer of 2014 to its bottom. The strongest forward returns in the table followed a weak performance in early 2016 that coincided with oil’s relative low on February 11, which also marked a relatively low in the AMZI.”

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.

“In 2020, the price move in oil and MLPs have been quick and drastic with the unprecedented demand impact from COVID-19 exacerbated by an oil price war that has finally been resolved with agreed production cuts,” adds Morris. “Each sell-off and recovery is unique, and the shape of the recovery for MLPs this time around could be swift as seen in 2016 or a slow grind. Through April 9, less than a month from the relative bottom, the AMZI had already gained over 40% on a price return basis. However, considering the magnitude of the recent sell-off, there is still much ground to regain for a true recovery to be realized.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.