As the Federal Reserve has begun to talk about a more dovish policy of rate hikes ahead, interest rates have trended down from recent highs, leading investors once again to search for more robust yields and income streams. And many of them are looking at energy and infrastructure master limited partnerships.
“In the first few weeks of 2019, we’re seeing positive inflows into MLP mutual funds and ETFs,” says Dennis Coleman, who leads the MLP research team at Merrill Lynch. He adds that’s a big change from the fourth quarter when the sector saw a very large volume of fund outflows.
The fund flow reversal has helped push the Alerian MLP Index up 12 percent in 2019, to a recent 250, though that's still far below the 2014 peak of 540. The sector's share prices endured a brutal multi-year stretch due to a steady stream of dividend cuts. A broad range of industry players had taken on too much debt in pursuit of growth and were ill-equipped to handle an environment of falling revenues and cash flow.
The Alerian MLP ETF (AMLP), for example, saw its quarterly distribution fall from $0.299 a share in the first quarter of 2016 to $0.1913 in the third quarter of 2018. (Fourth-quarter distributions will be made on February 8.)
This ETF tracks an underlying index of energy infrastructure assets including companies involved in energy processing, storage and pipelines. It is the sector’s largest ETF with $9.2 billion in assets, and it carries a 0.85 percent expense ratio.
Keep It Simple
Adding insult, too many MLPs were saddled with obligations to dole out millions in profits to their general partners who charged hefty management fees.
Since then, the vast majority of MLPs have shuttered those external management structures, in a process known as “simplifications.” Merrill’s Coleman says there were 18 such simplifications last year and the industry still has “a few more to go.”
He thinks the completion of that process will boost investor sentiment. And much stronger financial statements will also help draw investors back to the sector.
A few years ago, many MLPs sent out all of their cash flow in the form of distributions, leaving little margin for error. Now, the average MLP in the Alerian MLP Infrastructure Index has roughly 30 percent more cash flow than needed to support their distributions, according to Stacey Morris, director of research at Alerian, a research firm that runs a range of MLP industry indexes.