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Investors turn to MLP funds as U.S. energy bet while oil slides

NEW YORK – U.S. investors are zeroing in on exchange-traded funds that track master limited partnerships as a way to bet on long-term North American energy boom even as oil prices slide, convinced that these funds look relatively cheap and promise growth.

Master limited partnerships typically invest in energy infrastructure such as oil and gas pipelines and storage facilities. That makes them less affected by the decline in oil because such assets are more sensitive to volume of flows than commodity prices and usually have long-term contracts with producers.

They also offer high yields in a low rate environment. The Yorkville MLP Universe Index, which tracks all MLPs, yielded 5.4 percent at the end of November, double that of 10-year Treasury bonds.

Among the biggest MLP exchange-traded funds, the Alerian MLP ETF and the UBS ETRACS Alerian MLP Infrastructure Index ETN saw the largest net inflows last month of $161 million and $110 million, respectively. The Alerian fund, which is the most expensive MLP ETF, was up 7.7 percent so far this year through Friday, while the UBS ETF was up 11 percent.

In contrast, traditional energy funds, such as the SPDR S&P Oil & Gas Exploration & Production ETF and the United States Oil Fund are both down about 29 percent, according to Lipper data. Most of that decline has come since June, when crude oil began its months-long slide.

Related: Demand for pipelines bolsters MLPs

MLP funds have edged down so far this month along with the broader energy sector after the oil cartel OPEC’s decision maintain its output. That is seen putting pressure on North American producers and led some investors to expect to eventually weigh on MLPs. And to be sure, if oil prices dive further and stay low for long, the slump could lead to project cancellations.

But some analysts and investors see the dip as a buying opportunity. They say the funds are now cheap by historical standards, while the long-term outlook for the sector remains good – there is still a widely recognized need to build more U.S. energy infrastructure.

“MLPs are in a good spot,” said Rob Glownia, a quantitative analyst with RiverFront Investment Group.

MLP cash distributions, a key indicator of their health, remain strong. Roughly 98 percent of all MLPs either maintained or grew their distributions versus last year, according to data from Yorkville Capital Management LLC.

MLPs are also cheaper than other income-generating securities when historical yield spreads are taken into account. The average yield spreads over the past 10 years for MLPs over the 10-year Treasury and BBB-rated corporate bonds are 2.9 percent and 0.5 percent, respectively. Now, the spreads are 3.3 percent and 0.9 percent. The averages exclude 2008 and 2009, when the markets were roiled because of the financial crisis.

Investors have already poured in $4.1 billion of new money into MLP exchange-traded products compared with $464 million in net assets that have been added to oil ETFs this year, according to Morningstar data.

Alerian MLP ETF and UBS ETRACS Alerian, which both include natural gas and crude oil pipelines among their biggest investments, so far this year have added $1.7 billion and $649 million in assets, respectively, according to Morningstar data.


Some energy specialists warn that not all MLPs are created equal. There are about 125 MLPs in the United States, with $600 billion invested in a range of assets, from pipelines and barges to exploration and production. Their performance has varied widely.

Last month, for example, the best performing MLP, TC PipeLines LP, gained 15.5 percent, while the worst performing MLP, Mid-Con Energy Partners LP, fell 39.7 percent, according to Yorkville. TC PipeLines invests in natural gas pipelines, while Mid-Con Energy Partners focuses on the exploration and production of oil and natural gas.

MLPs also come with risks. For example, disruptions such as natural disasters and other weather-related events can cause hiccups like pipeline interruptions. A rise in interest rates would also make MLPs yields less attractive. But a sentiment-driven dip – Alerian ETF fell 4.4 percent and the UBS ETN 6 percent since November – is a chance to buy, says Peter Lazaroff, a portfolio manager at Acropolis Investment Management LLC.

“When prices dip like they have now, and they’re dipping for reasons that have nothing to do with fundamentals, it does present a good entry point,” he said.


(Reporting by Ashley Lau in New York; Editing by Paritosh Bansal and Tomasz Janowski)

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