With election uncertainty and the Dow’s flirtations with 12,000 points getting the lion’s share of media attention in the second half of this year, leading Wall Street money managers have been quietly getting back into MLPs since the summer. A September note by Morgan Stanley mentioned they “recently added to MLPs on the pullback in oil prices.” This was followed by a Neuberger Berman note that said “MLPs still have the potential to provide decent value for income- or yield-seeking investors relative to bonds and other alternative yield sources from the equity markets such as high-yielding stocks.” Amid the hunt for yield before today’s Fed rate increase, these perspectives look prescient ahead of OPEC’s recent announcement of planned production cutbacks.
MLPs
Within the MLP space, other asset managers are finding that opportunities are particularly strong in midstream segment of the MLP market. A research note published last week by Global X Funds, the $3.8 billion ETF issuer, maintains that midstream MLPs have been consistently provided earnings and distributions. Looking forward, the sector is supported by solid underlying fundamentals and may also benefit from increased infrastructure spending under the Trump administration, according to Global X.
Positive Earnings Amid a Sea of Negativity
The Global X report points out that five of the six energy sub-sectors have reported year-over-year earnings declines. Factset data found that these declines ranged from -85% to -41%. The lone positive earner, however, has been storage & transportation, with an 8% YOY increase in profits. It was also the only sub-sector to see a positive YOY revenue change, with a 3% increase.
This has translated into flat YOY adjusted EBITDA for midstream MLPs, whereas the broader energy sector saw a -22% drop in the same period. In turn, distributions have increased on average by 5% for midstream MLPs, compared to a -19% decline in the broader energy sector.
Insulation from Upstream Bankruptcies
Global X found that 76% of midstream MLP counterparties had investment grade ratings, helping insulate the midstream space from some of the effects of upstream bankruptcies. They caution that some individual MLPs have seen significant drops in transportation volume, while others have seen double-digit increases. The firm suggests that this “illustrates the need to invest in a diversified basket of midstream MLPs” instead of single-MLP exposure, which is not a surprise considering they offer the Global X MLP ETF (MLPA).
Further Room to Run
Looking forward, Global X suggests that if the Trump administration is able pass an infrastructure spending bill, midstream MLPs could be a big winner. Such a bill could get bipartisan support due to the potential to create more jobs and reduce US reliance on foreign energy supplies.
Furthermore, OPEC’s cuts could also be positive for US midstream MLPs as US producers would increase their output and add to midstream volume.
Echoing Global X’s research, Morgan Stanley followed up with a more recent note on December 6 that concluded “Investors may also want to consider master limited partnerships as a way to optimize total returns from the oil patch. Focus on midstream transporters that are leveraged to stable volume.”
Investors have been heeding these calls. MLPA has received close $100 million in inflows since Q2 with $25 million in November alone, according to ETF.com, bringing the total AUM of the fund to $380 million.
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