However, performance indicates that size matters. Nine out of the Alerian Index's top ten constituents enjoyed price gains in 2011. And five of them turned in total returns of more than 20%.
Sean Wells, an analyst at Steelpath Advisors, an industry specialist with $2.1 billion under management and which manages several open-end MLP mutual funds, believes that partnerships with market caps over $8 billion to $10 billion are generally less volatile than smaller ones. "Their steady performance," he explains, "comes from more diverse assets, more fee-based income, less commodity exposure and higher credit ratings that allow them to finance expansion at a cheaper cost."
MLPs
Energy master limited partnerships use four basic strategies, according to Scott Blankenship, Steelpath's vice president of sales and marketing. These are exploration and production; gathering and processing from wellheads to the pipeline, inclusive of refining; transportation; and storage.
If advisors are most attracted to the industry for its steady, attractive payouts, then they may be most effectively served by investing in transportation, i.e., infrastructure pipelines. "These MLPs offer the most transparent and steady stream of predictable, fee-based distributable cash flow, which is key for sustaining and growing yields and helping to ensure price stability," says Blankenship.
The business model of transport MLPs is development and maintenance of pipeline networks, from which they charge rent, to enable energy developers to move their resources from wells to storage and refineries and eventually toward distributors.
"Demand for pipeline access is fairly steady," according to Ron Weiner, CEO of Westport, Conn.-based asset manager RDM Financial, "giving these MLPs fairly predictable and attractive net income. Many contracts include inflation adjustors, providing investors a partial hedge against rising prices." And with little direct commodity exposure, he believes this segment of the industry is the least volatile.
According to the Wells Fargo MLP Index, there are 16 large-cap pipeline plays (Figure 3). Their market capitalizations range from the $3.1 billion Spectra Energy Partners (NYSE: SEP) to the $38.7 billion Enterprise Products Partners (NYSE: EPD), the industry's largest.
Selman Akyol, analyst at Stifel Nicolaus, the St. Louis-based brokerage and investment bank with $119 billion under management, believes EPD remains a compelling play.
