Now may be a great time to invest in MLPs. These partnerships provide superior yields, have a strong track record of increasing distributions and are poised for continued growth in income.
Historically, these partnerships have generally provided an average yield 2.5 percent higher than that of 10-year Treasury. Today, this gap is even higher, nearing 4 percent, as MLPs offer an average yield of roughly 6 percent. This differential could grow wider, as MLPs should increase their distributions by an average of 6 percent every year.
The entire MLP industry could soon receive a boon, as a Manhattan Institute whitepaper revealed that producers will soon by using big data to determine exactly where to drill, how far down to drill and when to leverage fracking.
The paper referred to this innovative use of information as Shale 2.0, and predicted that the method could double the production of a well when compared to Shale 1.0. Because of this breakthrough in output, areas that have projects with little infrastructure will see their demand for investment continue to rise.
As market participants sink more money into infrastructure, the number of MLPs will likely increase, and existing partnerships will probably expand. In addition, any such trend could help fuel consolidation within the sector.
If the industry experiences growth, MLP investors can expect it to produce rising income. While this potential outcome makes now a good time to buy MLPs in and of itself, investors should also keep in mind that now is a great time to buy because oil prices are historically low.
When this energy source falls in price, it is always a good time to purchase these partnerships. By perusing historical data, investors can observe that when oil prices fall, the Alerian MLP index declines as well, but not as much.
Then, after this initial pullback, the index will recover, because MLPs are transportation systems and get paid a fee for transporting energy sources. Even though these partnerships will see their prices take a hit when oil values fall, they will generate revenue on an ongoing basis as they move energy from point A to point B.
To give an example of how MLPs have held up even as oil prices failed to surge, let’s take a quick look at the period between June 2005 and June 2015. On June 30, 2005, WTI crude traded at $56.50 per barrel, and on June 3, 2015, it had a value of $59.62 a barrel.
As a result, the contract rose roughly 5 percent during that time, while the Alerian index has increased approximately 60 percent. After adjusting for compounded distributions, the total return is 222.1 percent.
While these returns may seem compelling, we at DeWitt are only interested in selecting the best MLPs for our clients, instead of merely taking a passive approach and investing in the Alerian MLP index. Because of this approach, we can potentially generate stronger results than the index, while still ensuring investors have all the tax benefits associated with direct ownership of these partnerships.