Oil prices have been in great shape as OPEC+ supply cuts tighten the market. The global benchmark Brent crude oil made strides toward $95 per barrel recently, following three weeks of successive gains that have boosted prices by about 10%. This surge comes as Saudi Arabia and Russia extend supply curbs until the end of the year,
per a Bloomberg article, as quoted on Yahoo.
Crude oil in London has seen a nearly 10% increase year to date. This uptrend is attributed to the production cuts led by OPEC+ and an improving demand outlook caused by hopes that the United States may avoid a recession and the fact that Chinese refineries are operating at full capacity.
Amid these factors, crude oil stockpiles have fallen, and speculators have increased their net-bullish bets on Brent and US benchmark West Texas Intermediate to a 15-month high.
Since the fate of energy players is highly dependent on oil and gas prices, investors can play the current situation with MLP ETFs. The space has gained about 2.9% in the past month versus 1.9% gains in the S&P 500.
We’ll tell you why.
Lure of Dividends
MLPs are known for their high-yielding nature as they do not pay taxes at the entity level and can thus pay out most of their income (more than 90%) in the form of dividends like the REIT firms. While most traditional income asset classes produced miniscule yields, MLPs lured investors with their higher payouts. The MLP segment yields a 7.94% annually versus 1.83% dividend yield offered by the S&P 500.
MLPs Are Undervalued than the S&P 500
Forward price/earnings ratio of MLP stands at 14.99X (versus 17.60X possessed by the S&P 500). Price/Sales of the MLP segment stands at 1.35X (versus 2.45X possessed by the S&P 500). Debt-to-Equity ratio of the segment is 0.02X versus 0.64X of the S&P 500. Return of Equity of the segment is 33.97% versus 17.34% of the S&P 500.
Strong Industry Rank
The dual benefits of upbeat oil prices and a high-yielding nature might favor MLP ETF investing at the current level. Investors should note that the Zacks Industry Rank of the energy and pipeline MLPs is in the top 9% (at the time of writing).
Below, we highlight a few MLP ETFs that were in the green in the past month and have decent dividend yields.
Global X MLP & Energy Infrastructure ETF ( MLPX Quick Quote MLPX - Free Report) – Up 1.6% Past Month; Yields 5.31% annually InfraCap MLP ETF ( AMZA Quick Quote AMZA - Free Report) – Up 4.62% Past Month; Yields 7.49% annually First Trust North American Energy Infrastructure Fund ( EMLP Quick Quote EMLP - Free Report) – Up 1% Past Month; Yields 3.68% annually Alerian MLP ETF ( AMLP Quick Quote AMLP - Free Report) – Up 2.8% Past Month; Yields 7.74% annually Bottom Line
Despite the bullish momentum, some market markers suggest the possibility of a pullback in oil prices. Brent's 14-day relative-strength index has been above 70 for the past few sessions, implying that the rally may halt anytime. If it happens at all, then also MLP ETFs should be in a sweet spot.
Stocks belonging to midstream MLPs have lower exposure to volatility in the underlying commodity prices. This is because midstream players generate stable fee-based revenues since the transportation and storage assets are being booked by shippers for the long term. Thus, their business model is relatively low-risk, signifying considerably lower exposure to both oil and gas price and volume risks.