Is It the Right Time Now to Buy MLPs?
MLP-Treasury yield spread
The Alerian MLP Index (AMZ) was trading at a yield spread of 5.86% to the ten-year Treasury yield by the end of last week (ended August 18). This is higher than last year’s average and its five-year average of 4.97% and 4.44%, respectively.
The spread is currently at its highest level since the beginning of 2017. The spread between AMZ and the Treasury yield widened due to the slump in the midstream energy sector, while Treasury yields have remained more or less constant.
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Of the total of 96 MLPs (master limited partnerships), 20 are trading close to their 52-week lows, with a difference of less than 3% between the current price and the 52-week low. This includes Boardwalk Pipeline Partners (BWP), Energy Transfer Partners (ETP), Buckeye Partners (BPL), Plains GP Holdings (PAGP), Magellan Midstream Partners (MMP), NuStar Energy (NS), and Plains All American Pipeline (PAA). Notably, six of these seven companies are liquids-heavy MLPs.
Plains All American Pipelines, Energy Transfer Partners, Enterprise Product Partners (EPD), and Magellan Midstream Partners (MMP)—the top MLPs by market capitalization—are currently trading at distribution yields of 11.6%, 12.0%, 6.7%, and 5.5%, respectively. These yields are significantly above their five-year averages of 6.7%, 5.3%, 5.0%, and 4.1%, respectively. Similarly, the yields of MLP funds such as the Alerian MLP ETF (AMLP) are also above their historical levels.
What do MLP current valuations reflect?
The recent correction in MLPs could indicate a buying opportunity, given recent robust drilling activity, despite the current weakness in crude oil and natural gas prices. The Permian, which is one of US most prolific shale plays, continues to see strong rig count growth.
According to the most recent rig count report published by Baker Hughes (BHI), the rig count in the Permian has grown 377 as of August 18, 2017, compared with 370 on June 30, 2017. Similarly, the natural gas-focused Marcellus Shale and Utica Shale plays continue to experience strong drilling activity.
However, current valuations could also reflect the current volatility in commodity prices, general pessimism across energy subsectors, and rising political and geopolitical tensions. Safer MLPs with strong growth guidance and low commodity price and volume exposure include EQT Midstream Partners (EQM), Antero Midstream Partners (AM), and Williams Partners (WPZ).
In the next part, we’ll look into the technical indicators for Williams Partners.