AMLP: What’s Next for Midstream MLPs after a Rebound?

Midstream MLPs (master limited partnerships) have shown a decent recovery recently after hitting multiyear lows early this month. The ALPS Alerian MLP ETF (AMLP) has rebounded more than 10% in the last two weeks. It hit an all-time low of $7.65 on December 3. The energy midstream space continued to underperform the broader markets when the latter is at record highs.

So far this year, AMLP is up just 3% while its top constituents, Energy Transfer (ET) and Enterprise Products Partners (EPD), are up 7% and 22%, respectively. Magellan Midstream Partners (MMP) has rallied more than 9%, while MPLX (MPLX) has fallen almost 15% year-to-date. These four collectively form almost 40% in AMLP.

AMLP: Technical indicators

AMLP is currently trading at $8.50, almost 2% above its 50-day simple moving average level. Its recent strength has pushed AMLP above its faster moving average level. This 50-day level close to $8.30 might act as a support in the short term. It crossed below the 50-day level in July and has seen weak trading since then.

AMLP is still trading 9% below its 200-day level, which might concern investors. This level of around $9.30 might act as a resistance zone going forward.

AMLP is currently trading in the overbought zone with its RSI (relative strength index) at 71. These RSI levels indicate that AMLP might see a reversal in its direction. EPD and ET are also trading in the overbought zone and have RSIs above 70.

Short interest in AMLP fell approximately 8% on November 29. Its total shorted shares or units came in at 36.3 million and totaled 39.6 million on November 15. A fall in short interest suggests that investors expect the stock to fall from its current levels, and it measures investors’ anxiety.

MLPs usually have little direct exposure to energy commodities such as crude oil and natural gas. Their profitabilities are mainly driven by the volumes of the energy commodities they carry. Declining global demand for oil and gas in an oversupplied market has hurt investor sentiment recently. Lower production guidance from exploration companies is also negative for midstream companies.

Distribution yields

Many midstream MLPs currently offer a handsome distribution yield. AMLP offers a yield of 9.2%, while Energy Transfer’s distribution yield is around 9.4%. Currently, EPD and MMP yield close to 6.4%. However, higher yields generally bring along higher risks as well. This trend might lead to distribution cuts if lower production volumes result in concerningly low levels of cash flows.

While midstream MLPs notably underperformed this year, C corporations did fairly well. Leading C corporations Kinder Morgan (KMI) and Williams Companies (WMB) have surged more than 42% and 6%, respectively, so far this year.

Jefferies cut MPLX’s target price from $35 to $34 on December 18. RBC cut Plains All American Pipelines’ (PAA) price target from $26 to $20 last week. PAA forms 9% of AMLP. Goldman Sachs gave a “buy” rating to Magellan Midstream Partners late last month.

To learn more about energy midstream MLPs, please read Why Frac Spreads Affect Some MLP Stocks.