The Alerian MLP Index (AMZ) has gained 18% since its February lows, resulting in YTD (year-to-date) gains of 2.0% on a price basis. Including a 7.5% yield, AMZ has returned 9.5% YTD on a total return basis. Meanwhile, the S&P 500 Index has returned 8.0% on a total return basis.
AMZ’s YTD gains could be attributed to the slight recovery in crude oil and natural gas prices from its February lows and the corresponding improvement in drilling activity. Enable Midstream Partners (ENBL), NGL Energy Partners (NGL), and Golar LNG Partners (GMLP) are among the top YTD gainers of AMZ.
During the fall in US energy prices, investors dumped anything related to oil and natural gas. Even MLPs (master limited partnerships), which generally have lower commodity price exposure or fee-based revenues, saw major sell-offs.
In February 2016, AMZ was trading close to its lows during the financial crisis. AMZ is a capital-weighted index that tracks the performance of MLPs, 93.2% of which is made up of midstream MLPs. The Alerian MLP ETF (AMLP) tracks the performance of AMZ.
The fall in MLP stock prices was largely due to general negative sentiment toward the energy sector in 2H15 and production declines in some regions as it became unprofitable for drillers to continue drilling at sub-$30 crude oil price levels. Midstream MLPs’ throughput volumes are linked to crude oil and natural gas production growth.
However, investor confidence toward MLPs seems to be returning. This can be seen in higher capital inflows in MLP funds in 2016, as compared to the second half of 2015. So in this series, we’ll look at MLP fund flows in recent quarters in order to explore the reasons behind renewed investor sentiment.