Rising Income in the Pipeline

The yield chase has turned into gut check for energy investors, their capital losses year-to-date exceeding distributions.

The Alerian MLP Index, which tracks pipeline operators organized as master limited partnerships, dropped nearly 6% during the first half of the year, while returning 3.5% or so via distributions based on its current annual yield a tad over 7%. Investors fretted the drop in energy prices and feared further declines as shale drilling ramps.

But as energy prices stabilized recently MLPs bounced back, rallying nearly 8% over June’s last seven trading sessions.

This is the second time in the last two years that investors have mistakenly assumed that pipeline stocks depend solely on shale output and oil prices. In fact, the midstream infrastructure these stocks front is vital  for meeting America’s vast and steady energy demand at any price of oil and natural gas.

Much of the natural gas moving along long-haul U.S. pipelines is contracted by utilities that tend to burn  more of it at the expense of coal when the price drops. Similarly, motorists use more gasoline at lower prices.

Lower oil and gas prices also tend to be the result of rising output from U.S. shale fields accounting for the bulk of new global supply in recent years. That’s certainly taken a bite out of midstream margins, but higher volumes will tend to offset some of that hit.

In fact, a majority of MLPs in the Alerian have continued to increase payouts to unitholders, and most of the rest maintained the dividend. Just 4 of the 37 reduced their distributions year-over-year. And many of those with rising payouts increased them dramatically.

MLPs’ reliance on equity sales for some of their growth capital remains a key concern, since higher yields could make the growth projects uneconomical. The partnerships found plenty of private capital to fill such financing gaps last year, albeit at a higher cost. And some that didn’t formally reduce their distributions accomplished the same goal by means of intramural mergers with affiliates.

The sector certainly could use higher energy prices to put all the doubts to rest – and these should arrive eventually. In the meantime, MLPs have demonstrated staying power and continues to offer attractive yields from tax-advantaged income streams. Join us at Income Millionaire as we pursue the most compelling midstream opportunities.