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Are MLPs Undervalued after 1Q17?

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MLP-Treasury yield spread

In Part 1 of this series, we saw that 1Q17 was one of the best quarters for MLPs after the rout in energy prices. Now let’s look at their current valuations compared to historical levels.

The Alerian MLP Index (or AMZ) is currently trading at a yield spread of 4.6% to the ten-year Treasury rate. It’s also higher than the five-year average of 4.4%. That could indicate that MLPs are cheaper than historical levels.

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Why MLPs rose independently

Theoretically, risky assets should have more yield than risk-free assets since investors require more return for the assumed risk. The continuing fall in energy prices since mid-2014 caused MLP yields to rise independently of the movements in Treasury yields. The recovery in commodity prices and the corresponding recovery in drilling activity since early 2016 drove MLP valuations slightly higher.

Energy Transfer Partners (ETP), Sunoco Logistics Partners (SXL), and Enterprise Products Partners (EPD) are among the midstream MLPs that are trading below their historical valuations.

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