Disappointing oil prices had pushed MLPs out of favor, but tidier balance sheets and new ideas for renewables may be set to change that.
After several years of tepid performance, master limited partnerships (MLPs) are back on investors’ radars. Offering investors partnership interested in oil and gas businesses, the structures can provide diversification to a portfolio, along with unique tax benefits.
Indeed, after several years of being out of favor due to a sudden drop in the price of oil and volatility across the oil and gas sector, MLPs are back.
After a long period in which oil and gas names have worked to clean up their balance sheets, industry analysts have noted that the MLP space is now stronger and less prone to the wild speculation that defined years past. Investors tied to the sector are expected to enjoy a more consistent rate of return throughout the next couple of years, with the potential for increased distributions if prices and demand remain as elevated as they have been.
Demand powers dividends
Brian Kessens, a portfolio manager at Tortoise Advisors, pointed out that the demand for midstream companies remains particularly high. MLPs can include investments in companies that operate throughout the energy supply chain, but a lot of the sector’s strong performance has been driven by midstream companies.
For investors who are considering MLPs, it is important to understand all of the assets that are included in the partnership structure as part of the due diligence process to ensure a diversified exposure to the sector. Investors will also want to be comfortable with the management structures in place, he said.
‘We think hydrocarbons are going to continue to tick higher, and investors in MLPs should expect solid performance over the next 12 months,’ Kessens explained.
He added that the price of WTI Crude tends to drive sentiment for MLPs, and as long as crude stays at $45 or above, it is likely that the sector will continue to perform well. Leverage throughout the sector also remains relatively low, which could dampen any volatility if pricing weakens.