Midstream MLPs have significantly underperformed the broader markets and have lost more than 10% YTD (year-to-date). The ALPS Alerian MLP ETF (AMLP), the representative of the top MLPs in the US, plunged to record lows last week. It’s currently trading near its all-time low of $7.7. The overall sentiment in the energy sector remains dismal.
Top MLP underperformers this year
Energy Transfer (ET) and Magellan Midstream Partners (MMP), two of AMLP’s top constituents, have lost 10% and 2%, respectively, YTD. Enterprise Products Partners (EPD), the ETF’s biggest component, has soared more than 7% in the same period, while MPLX (MPLX) has lost 20% YTD. These four companies make up 40% of AMLP.
MLPs have little to no direct exposure to crude oil and natural gas prices. Their profitabilities are largely dependent on the volumes of the energy commodities they transport. Falling global demand for oil and gas in an already oversupplied market has dented investor sentiment recently. Lower production guidance from exploration companies is also a negative for midstream companies.
What’s next for AMLP?
AMLP is currently trading at $7.8, almost 8% and 16% lower than its 50-day and 200-day moving average levels, respectively. Its large discounts to both these key levels highlight weakness. AMLP broke below its 50-day moving average level in August and has been weak since then. Its 50-day level of close to $8.6 could act as a resistance for it in the short term.
AMLP’s RSI (relative strength index) currently stands at 38, indicating that it’s neither overbought nor oversold. Its RSI level touched a record low of 11 last week.
Midstream MLPs have notably slumped despite decent earnings growth this year. In 2019 so far, Energy Transfer has reported an average adjusted EBITDA growth of 35% year-over-year. However, ET is trading close to its 52-week low. The stock also came under pressure recently due to a corruption investigation at one of its projects. MPLX also hit a multiyear low last week despite its solid earnings growth this year.
Top midstream C corporation Kinder Morgan (KMI) is up approximately 28% YTD.
Record high distribution yields
The recent fall in MLP units has made their distribution yields look more attractive. AMLP is currently trading at a distribution yield of 9%, significantly higher than those of the broader markets and the benchmark Treasury yields. Energy Transfer offers a distribution yield of 11%, while MPLX also yields 11%—both higher than their five-year average yields.
However, higher distribution yields alone may not impress investors. Juicy yields are generally associated with higher risk. Thus, lower production volumes for MLPs could mean lower cash flows, which could eventually result in distribution cuts.
Brokerages remain pessimistic on these midstream MLPs for the moment. JPMorgan Chase cut MPLX’s target price from $35 to $32. Credit Suisse also cut its target price from $33 to $29. Citigroup cut Plains All American Pipeline’s (PAA) target price from $28 to $23 yesterday.