Getting Paid to Play The Energy Patch
The energy sector lagged the broader market in 2017, but the group cobbled together some momentum late in the year. On the back of rebounding oil prices and soaring U.S. output, some of that momentum is making its way to 2018 and that bullishness is affecting master limited partnerships (MLPs).
For example, the Alerian MLP Infrastructure Index (AMZI Index) jumped 5.94% in January. That is the underlying index for the Alerian MLP ETF (AMLP), the largest exchange traded fund (ETF) dedicated to MLPs. MLPs are an asset class beloved by income investors due to dividend yields that exceed those of traditional equity investments. To gain the tax-advantaged status of MLPs, these partnerships must pay out significant percentages of their cash flows in the form of distributions.
It is not unusual for MLPs to sport higher dividend yields than competing income assets, such as real estate and Treasuries. The chart below confirms the high-yield status of MLPs relative to rival income-generating assets.
More Than Just A Yield Play
Obviously, the yields on many MLPs and the related ETFs are eye-catching, but there are other catalysts for this asset class and funds such as AMLP.
One of those catalysts is soaring U.S. oil production, which is meaningful for MLPs because, on a historical basis, MLPs are not highly correlated with oil futures' price action. Rather, the “toll-road” business model of MLPs is more levered to the storage and transportation side of the oil and natural gas equation.
Improving production trends have given way to rising growth expectations for midstream operators, the area of the energy landscape in which MLPs dwell. Eras of increased oil volatility, such as the commodity's 2014-2015 bear market, prompted some market participants to overlook the solid fundamentals associated with some MLPs. That situation could reverse this year amid stellar output expectations in the U.S.
In November, U.S. oil output topped 10 million barrels per day (bpd) for the first time since 1970, but the key difference between then and now is that U.S. production was on a downslope back then. The opposite is true today. In fact, the Energy Information Administration (EIA) expects U.S. crude output to steadily climb this year before reaching 11 million bpd in late 2019. By some estimates, the U.S. will soon surpass Saudi Arabia and Russia as the world's largest oil producer.
COURTESY: AMERICAN ENTERPRISE INSTITUTE
Another reason AMLP may have the wind at its back this year is the recently passed Tax Cuts and Jobs Act. That legislation reduces the federal corporate tax rate from 35% to 21%, which is a boon for a bevy of sectors, but in particular energy, which was previously among the highest taxed groups in Corporate America.
While MLPs already received favorable tax treatment, the new tax code could prompt MLPs to increase investment at a time of rising U.S. output.
Tax reform “appropriately preserves the favorable tax attributes for master limited partnerships and encourages MLPs to continue investing in infrastructure growth opportunities, which contributes to U.S. job and GDP growth,” said Enterprise Products Partners LP (EPD), 10.40% of AMLP's weight, on a January conference call.
Back To Distributions
From 2016 through late 2017, some MLPs took painful, but necessary steps to shore up their balance sheets, including intense deleveraging and, in some cases, dividend cuts. Of course, no income investor enjoys reading headlines about negative distribution action, but the deleveraging efforts in the MLP space look promising as free cash levels are on the rise, a sign that MLP management teams could renew their focus on growing payouts.
As of early February, the AMZI Index yielded 7.44%, good for a spread of 460 basis points (bps) over 10-year Treasuries. That is above the 10-year median spread of 414 bps.
Cash flows for MLPs have been rising in recent years, a trend that is expected to continue over the next several years. Those expectations are supported by reduced capital expenditures and soaring volumes on the back of surging U.S. output of crude and natural gas.
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.675.2639 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
Alerian MLP ETF shares are not individually redeemable. Investors buy and sell shares of the Alerian MLP ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of AAI. In addition, AAI assumes no responsibility to ensure the accuracy of the content written by the author.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus. Past Performance is not indicative of future results.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the Alerian MLP ETF. AAI is affiliated with ALPS Portfolio Solutions Distributor, Inc.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
Most Read IRIS Articles of the Week: Feb 19-23
Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, Feb 19-23, 2018
Click the headline to read the full article. Enjoy!
I’d like to introduce you to Peggy. Born in 1956, Peggy will be 62 in 2018. She has worked in retail her whole life, the past twenty-five years spent in management. Peggy divorced from her husband 14 years ago, is still single and has no children. — Dana Anspach
This week the markets shrugged off last week’s fears and went back to the slow and steady melt up, despite economic news that looked likely to once again rock the boat. — Lenore Elle Hawkins
Themes established in 2017 across a wide range of markets and factors continued to resonate through the fourth quarter. Economic growth was strong and supportive of equity markets across the globe, a range of volatility measures reached all-time lows, and business and consumer sentiment remained elevated. — Yazann Romahi and Garrett Norman
Advisors and investors that feel they are hearing more and more about commodities and the corresponding exchange traded products in recent months are right. That is a natural result of dollar weakness and yes, the greenback is floundering again in 2018. — Tom Lydon
As the industry works to cope with new regulation, wades through an outpouring of new products, learns to satisfy investors’ shifting priorities and manages the active-passive debate, the viability of business units will be questioned, and at times radical measures will be taken. — Peter Hopkins
My hope is that this article points out some opportunities for you to make more money and serve your clients at a higher level and that you decide to do something about it. — Bill Bachrach
Whether the market is flying high or taunting your emotions with new lows and some bumpy volatility, here are four things every investor should keep in mind ... — Lauren Klein
Why financial advisors NEED to understand much more clearly the power of good digital market. With tools like AdvisorStream, it’s easier than ever to get the content you need to drive leads and referrals today! — Kirk Lowe and Matt Halloran
How do some firms and ideas go from nowhere to everywhere in a few short months? All of a sudden a restaurant becomes popular, a gas station gains a cult following, or a Broadway show becomes too popular to get a ticket for years. — Maribeth Kuzmeski
"Worldwide, $27.4 billion poured into fintech startups in 2017, Accenture reports, up 18% from 2016. With so much in play, it’s not surprising that 22 companies are new on this, the third edition of our list." — Chris Skinner
Many sensational headlines have been written the past few weeks about market declines, but two things have increased for sure: the viewership and the ad revenues of financial media organizations — Preston McSwain
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