The energy sector has delivered some negative dividend news this year, but some market observers still see opportunities for reliable income with master limited partnerships, including some residing in the ALPS Alerian MLP ETF (NYSEArca: AMLP).
AMLP seeks investment results that correspond generally to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index. The index is comprised of energy infrastructure MLPs that earn a majority of their cash flow from the transportation, storage, and processing of energy commodities.
In an interview with Lawrence Strauss of Barron’s, Morgan Stanley’s Devin McDermott points to several MLPs with midstream exposure that can still deliver the goods for income investors.
“Those include Magellan Midstream Partners (MMP) and Enterprise Products Partners (EPD), both of which are master-limited partnerships—popular income vehicles, at times. Those two MLPs were recently yielding 11.8% and 11%, respectively,” according to Barron’s.
Master Limited Partnership Benefits
Moreover, these services are under long-term contracts. Master Limited Partnerships charge a fee for each barrel of petroleum or MMcf of natural gas transported. This covers smaller pipelines connecting wells to hubs or processing facilities for natural gas, which are more sensitive to production dynamics, along with Larger, longer pipelines that connect hubs or producing regions with end markets. These MLPs typically charge rent for third parties to use storage tanks.
MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.
Income-minded investors may find pockets of opportunity in the energy segment through infrastructure-focused Master Limited Partnerships (MLPs) and corporations that generate robust yields. Unlike oil producers and services companies, energy infrastructure companies provide real business-line diversification in the energy sector, as they deal with the transportation, storage, and processing of energy, which are far less reliant on commodity prices.
According to Barron’s: “Those [stocks]all have fairly compelling dividend yields that are sustainable, even in this new normal, and they all have strong balance sheets to give then flexibility through this cycle,” McDermott says, referring in part to weak commodity prices and margins for potentially an extended period.”
Other funds with exposure to income-generating energy assets include the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (NYSEArca: MLPA).
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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