Where MLPs’ Valuations Stand Compared to Historical Averages
MLPs were trading near an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 15.0x during 3Q14.
At that point to time, investors believed that MLPs were protected from volatility in commodity prices and would continue to grow their distributions for many years to come, driven by strong US energy supply growth. This belief resulted in increased MLP exposure, which drove MLPs’ valuations higher.
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An eventual fall
MLPs’ valuations dropped significantly in the end of 2015 and at the beginning of 2016. Investors dumped anything related to oil and natural gas with the fall in the US energy prices. Even MLPs, which generally have lower commodity price exposure and fee-based revenues, saw major sell-offs. The fall in MLPs’ prices was largely due to an overarching negative sentiment toward the energy sector in 2H15 and production falls in some regions.
MLPs were trading close to an EV-to-EBITDA multiple of 10.0x, quite low compared to the historical average multiple of the Alerian MLP Index (or AMZ). The Alerian MLP ETF (AMLP) tracks the performance of AMZ.
The slight recovery in commodity prices and the corresponding recovery in drilling activity since February’s lows have driven MLP valuations higher. Currently, MLPs are trading at 12.6x, higher than AMZ’s average multiple since its inception and higher than its multiple following the financial crisis.