Master limited partnerships or MLPs have been on an uptrend lately with several energy-related investments. The largest MLP ETF Alerian MLP ETF (AMLP - Free Report) gained more than 6.4% in the last one month (as on Sep 19, 2017) though the space previously struggled immensely with sliding oil prices. So far this year (as on Sep 19, 2017), the fund is down about 11%.
Below we highlight a few reasons which led to these gains and see if the MLP rally continues.
Demand-Induced Jump in Oil Prices
As soon as oil price staged a rally on the prospect of output cuts by OPEC and non-OPEC countries, most of the energy MLPs started marching northward. Energy stocks recorded the biggest weekly gain of the year lately (read: How to Trade the Oil Rally with ETFs & Stocks).
Energy Select Sector SPDR ETF (XLE - Free Report) saw its best week of this year recently. The reason behind the uptrend is believed to be the possibilities of the OPEC discussing the extension of the output cut deal, as per a portfolio manager at Tortoise Capital.
Not only this, demand jumped 2.4% in the second quarter of 2017. This led International Energy Agency (IEA) to upgrade its global oil demand estimate for this year. Along with the demand-induced rally, OPEC output declined in August for the first time in five months.
Less-Than-Expected Impact of Harvey
As per Reuters, Harvey has thumped a quarter of oil production from the Gulf of Mexico and over 10% of U.S. refining capacity. The area is a major hub for oil refineries. Several energy companies and some MLPs have shut down their operations and ‘took pipelines and storage facilities out of service.’
But as per an article published on barrons.com, the impact of the hurricane probably wasn’t as harsh as feared. Energy infrastructure started operating sooner than expected. Also, the barrons.com article went on to explain that many partnerships have insurance coverage to make up for damages (read: Hurricane Harvey Puts These ETF Areas in Focus).
Lure of Dividends
MLPs are known for their high-yielding nature as these do not pay taxes at the entity level and are thus able to 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.
Yes, MLPs underperform in a rising rate environment as these have to depend on the debt market to finance their operations or fresh projects. Naturally, higher rates amid the Fed tightening cycle would cut back their profitability. But investors should note that many MLPs use a fixed rate debt for their borrowings.
Can the Rally Last?
In a nutshell, if energy stocks remain steady and investors’ drive for dividends stay strong, MLP ETFs have more room to run.
Below we highlight a few MLP ETFs which delivered some of the highest returns in the last one month and offered sturdy yields (as on Sep 19, 2017).
VanEck Vectors High Income MLP ETF (YMLP - Free Report) -- Yields 8.73% annually
Morgan Stanley Cushing MLP High Income Index ETN (MLPY - Free Report) – Yields 8.65% annually
UBS E-TRACS Alerian Natural Gas MLP Index Fund (MLPG - Free Report) – Yields 5.97% annually.
ALPS Alerian MLP ETF (AMLP - Free Report) – Yields 7.98% annually.
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