You don’t want to miss the boat on master limited partnerships (MLPs) especially now that the asset class is receiving more press. A recent Wall Street Journal piece by Tom Lauricella and Carolyn Cui, “Frenzy in Energy Partnerships,” shed more light on the relatively unknown natural resource pipeline market, which has been attracting billions of dollars owing to its attractive 6%–7% yield. In fact, as the article points out, through the beginning of this month, MLPs rallied 15% on the year and 11% per year over the past 10—as measured by the industry benchmark, the Alerian MLP Index—for basically collecting rent on pipes. And over the past 10 years, the industry has grown from less than $20 billion to its current $200 billion, leaving some investors worried about current valuations.
At these levels, selection becomes ever more crucial, a fact not lost on SteelPath Fund Advisors’ MLP expert Gabriel Hammond. Before buying an MLP, he studies what the whole company would be worth, asking a simple question: “What would we pay for those assets to bring them onto our own balance sheet?” In doing so, he puts a price on MLPs based on their future stream of income and competitive advantage in a high-barrier-to-entry business.
I like a properly chosen mix of MLPs for your equity portfolio, especially as we prepare to enter the Great Reflation. During inflationary times, you want to own assets, like the pipelines and pumping stations of MLPs. Also, the rent on their pipes is usually indexed to the Producer Price Index (PPI) to guarantee an inflation-protected stream of income. And since it’s a volume business, you don’t have to live or die by the daily price swings in oil and natural gas, the two main pipeline commodities.
MLPs are sensitive to interest rates. Steelpath Fund Advisors wrote the following back in 2009 when average yields were 8%: “In practical terms, this means that a 100 basis point shift to a 9.0% yield would result in an 11.0% price decline in the group.” Not comforting to those in retirement, I’m sure. But the analysis goes on to say, “Because of the ability to grow their cash flow base, MLPs relatively outperform in a rising interest rate environment.” If caught in such a situation, I would certainly be content just patiently collecting yield, much as with a preferred stock with the added boost of an inflation-protected income.
It’s likely that future demand will be solid for oil and natural gas MLPs. Living in the northeast, I recognize firsthand the dire need of additional pipeline infrastructure. As of now, we depend on a significant amount of imported liquefied natural gas. In addition, renewable energy technologies, and specifically solar and wind power generation, have a long way to go before replacing oil and gas. Exploration and production companies are also more and more likely to get out of the pipeline businesses they own, shedding a non-core competency, probably creating more MLPs. And let’s not forget that their new discoveries from shale will need to be brought online, especially if there’s a push to move away from foreign oil. SteelPath’s prediction of 1% energy demand growth seems realistic as our population grows, spreads out, and consumes more energy.
I recommend the no-load, no-12b-1-fee SteelPath MLP Income Fund (MLPZX). If you are interested in owning less than $1 million of these institutional shares, you’ll likely need to work with an investment advisor. Richard C. Young & Co., Ltd., initiated a position when the fund first opened, enabling clients to own smaller amounts. I think you too will benefit from the steady income MLPs generate in the equity component of your portfolio, especially in retirement.
Latest posts by E.J. Smith (see all)
- Your Survival Guy Goes to College (Sort of) - May 24, 2019
- Are Green Energy Backers Out Over Their Skis? - May 23, 2019
- Right to Work States Preserving the American Dream - May 22, 2019