A common misconception among the investment community is that all MLPs have been severely hurt across the board. While it is true that upstream and downstream MLPs have been on a rough ride due to the bear market for crude oil and natural gas, pipelines in the midstream sector have held their own. So while there may be choppy waters ahead for upstream and downstream MLPs due to direct exposure to commodity price volatility, the midstream sector is dependent on domestic energy activity, which has the potential for significant growth with the demand for infrastructure projects.
Bright future for midstream MLPs
Despite recent declines, the future continues to be bright for midstream MLPs. For evidence of that, investors simply need to observe the recent market trends as larger MLP entities have begun acquiring smaller companies in the sector while they wait for the inevitable demand increase for natural gas. In fact, according to a recent report by Neuberger and Berman on natural gas, the current global demand for natural gas is 65 billion cubic feet per day, but this demand is expected to grow 2 percent by 2025. As pipelines are the most efficient and cost-effective mode of transport for liquids and gas, the midstream sector is positioned for a significant growth period in the coming years. Therefore, MLPs have premium value at bear market gas prices as the majority of midstream companies will continue to maintain and exceed current income levels.
MLPs for yield hungry investors
MLPs frequently beat out other asset classes, so they are ideal for investors looking for yields. In fact, with the Alerian MLP ETF Index at $8.4 billion and now offering top-ranking yields at 7.5 percent, MLPs are delivering handsome returns. However, their value is magnified by the fact that the balance is a deferred income tax expense. So for shareholders who are hungry for income from dividends, MLPs offer value because of their keen predictability.
MLPs offer alternative investment value
MLPs offer tax advantages because they pass on tax deferred distributions as dividends to investors. Ultimately, any way an investor can look at MLPs, they offer great value. Similar to the upstream and downstream sectors in offering high dividend yields, midstream MLPs are not exposed to the dangers of distribution cuts. This is due to the fact that high yields from midstream companies can overcome high capital depreciation because of their attractive yields, unlike the upstream and downstream sector.