What MLP Valuations in June Tell Us Now
The MLP-Treasury yield spread
Alerian MLP Index (AMZ) was trading at a yield spread of 4.82% to the ten-year Treasury rate by the end of June 2017, which is higher than the five-year average of 4.37%.
The continued fall in energy prices since mid-2014 has caused MLP (master limited partnership) yields to rise independently of the movements in Treasury yields. But MLPs recovered, and price levels rose above their five-year averages in early 2017 driven by strong distributions and despite commodity price volatility, measures to strengthen balance sheets, the slight recovery in commodity prices, and the corresponding recovery in drilling activity since mid-2016.
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But MLPs have retreated due to the current uncertainty in the US energy sector. Energy Transfer Partners (ETP), Plains All American Pipeline (PAA), and Enterprise Product Partners (EPD) are among the midstream MLPs that are currently trading below their historical valuations.
What do MLP valuations tell us?
The decline in MLP valuation in June could reflect the uncertainties in the US energy sector due to recent volatility in crude oil and natural gas. But MLP valuations look attractive right now, in light of the Trump administration’s plans to achieve energy dominance through higher production and energy exports.
According to US Energy Secretary Rick Perry, “An energy dominant America means self-reliant…a secure nation, free from the geopolitical turmoil of other nations who seek to use energy as an economic weapon.”
Perry added that “an energy dominant America will export to markets around the world, increasing our global leadership and our influence.”
Higher LNG exports
The US is planning to boost its energy exports mainly through higher LNG (liquefied natural gas) exports, coal exports, and pipeline exports of crude oil and refined products to its neighboring countries. Higher LNG exports would benefit the entire natural gas midstream value chain, including natural gas production, gathering and processing, transportation, and liquefaction.
Similarly, crude oil and refined products exports would benefit MLPs involved in liquids transportation and storage, including Energy Transfer Partners, NuStar Energy (NS), and Magellan Midstream Partners (MMP).