10 Considerations When Evaluating the MLP Outlook Going Into 2016
10) After the 2014-15 drop, the Alerian MLP Index is now flat over the last six years, and yet dividend growth is 55.6% (cumulatively) over same period.
9) The financial crisis drop was 47% in MLP’s from top-to-bottom; the drop from 2014 to current prices is, you guessed it, 46%.
8) For contrarians out there, last quarter was the first quarter since the financial crisis with negative fund flows into MLP funds.
7) Short interest is presently 80% higher than it was in 2014.
6) Growth in distributions has still averaged 10% in 2015, well after the sell-off in crude oil prices from Q3 and Q4 of 2014.
5) Strongest sub-sectors for the MLP space in terms of dividend growth have been Natural Gas/Natural Gas Liquids Infrastructure names, and the General Partners of diversified pipeline businesses.
4) MLP price deterioration in the second half of 2015 has coincided with no MLP IPO’s, very few secondary offerings, and debt offerings that were 78% lower than they were in the first half of 2015. In other words, operational performance didn’t deteriorate; access to capital did. In 2009 and 2010, after financial markets had bottomed, capital markets re-opened and over $50 billion of capital was raised in public equity and debt markets.
3) Delineation of pipeline companies and MLP’s is so key. Some names have debt-to-earnings ratios of 2.5x; others have ratios of 5.8x. Some have distribution coverage that is negative; others have 140% coverage of their distribution (i.e., how much cash flow they generate compared to what is paid out as distribution to investors). It is not as monolithic as it has been acting.
2) The yield spread of MLP’s as measured by the Alerian MLP Index over the 10-year treasury yield is currently more than double its historical average. To put some numbers on that, the average premium in yield a MLP investor gets over a Treasury bond investor is 3.75%. The premium is currently 7.9% (as in, 7.9% more than the 2.2% treasury yield).
1) Historical performance of MLP’s, after many of the above metrics have been realized (blown out yield spreads, heavy short interest, negative flows, a disconnect between price performance and distribution growth, high correlation amongst MLP names regardless of financial metrics, etc.) has been robust, to say the least. Every investor and surely every adviser must know that past activity is not a guarantee of future results, but the historical reactions to these conditions have been very positive for MLP investors. Will 2016 be the year for recovery? 2017? Both? We make no guarantees, and are stunned at the degree to which markets have brought MLP prices down. But the fundamentals should drive all considerations, whether that year be 2016 or any other year, and the aforementioned considerations tell us a lot about the fundamentals.
Originally posted on HighTower Advisors.