MLP yield spread
So far in this series, we’ve looked into MLPs’ YTD performances, which include broader sector performance, the performance of various MLP subgroups, and MLP top gainers and underperformers.
Moreover, we talked about MLPs’ funds flows and distribution yields. In this article, we’ll analyze MLPs’ current valuations based on yield spreads and valuation multiples.
The Alerian MLP Index (^AMZ) was trading at a yield spread of ~5.6% to the ten-year Treasury rate as of March 16, 2018. This is higher than the five-year and one-year averages of ~4.5% and 5.1%, respectively.
The spreads between AMZ and other investment options such as the S&P 500, corporate bond yields, utilities, and REITs are higher compared to the historical average.
MLPs on average are currently trading at an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 9.0x. This multiple is below the historical five-year average of 12.0x.
Enterprise Product Partners (EPD), MPLX LP (MPLX), and Energy Transfer Partners (ETP) were trading at 12.6x, 10.3x, and 7.6x, respectively. These multiples are below the historical five-year averages of 14.5x, 13.9x, and 11.1x, respectively.
What do these MLPs current valuations indicate?
MLPs’ current discount compared to historical levels, despite strong crude oil prices and strong drilling activity, might indicate a buying opportunity. This assessment is based on their strong expected earnings growth driven by projects placed into service during 2017, upcoming projects, and strong throughput volumes growth resulting from strong production growth.
Goldman Sachs expects a long-term average earnings CAGR[2. compound annual growth rate] of 6.4% and average earnings growth of 11.5% during the 2018–2019 period.
In the next article, we’ll look into the MLPs with highest capital spending plans for 2018.