Patient Investors Look To MLPs For Income…A 2016 Outlook
No doubt about it, current market conditions are tough but distribution cuts across the board are being priced into MLPs right now. So while things are likely to be volatile for the near term, we think they can only get better, especially if you have a 12+ month time horizon. The current yield on the Tortoise MLP Index is north of 10% and we still expect distributions to grow on a weighted average basis. Our proprietary financial models forecast cash flow growth that would allow at least 5% distribution growth but we recognize that at current yields the market isn’t paying for growth, it prefers stability. So let’s assume management teams take the more conservative route and choose to grow coverage rather than distributions. Even in our low case we see distributions growing about 2% at the index level. This would result in a cash-on-cash return of that 10% yield + 2% growth or low double digit total returns. However, assuming the market stabilizes at some point and valuations return to longer-term averages, returns could become multiples of this rate.
Reasons to invest in MLPs
In our view, the U.S. energy revolution is not over . In fact, break even economics for oil and gas production continues to decline and the U.S. is producing more natural gas and more natural gas liquids than ever before. Natural gas liquids exports continue to grow and early next year the U.S. will begin exporting natural gas in the form of LNG. And the U.S. is now able to economically recover more crude oil than ever before.
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