The Alerian MLP Infrastructure Index, a capitalization-weighted index of prominent master limited partnerships (MLP) that own pipelines and other midstream assets, has gained more than 60 percent since mid-February 2016—more than three times the total return posted by the S&P 500.
MLPs experienced a Minsky moment last fall that extended into the first month of 2016, as the collapse in oil prices prompted a wave of forced liquidations that sent these stocks plummeting to valuations not seen since the 2008-09 bear market.
Despite sensationalist arguments attributing the selloff to fatal flaws in the MLP structure itself, publicly traded partnerships that specialize in midstream infrastructure remain alive and well.
However, investors must understand the strengths and weaknesses of the MLPs in their portfolios instead of focusing on their above-average yields and tax advantages.
If indiscriminate selling characterized MLPs’ Minsky moment late last year and in January 2016, indiscriminate buying has driven the recent rally. Energy MLPs remain suitable investments for income-seeking investors, but bullish and bearish investors who paint the group with a broad brush won’t fare as well as those who follow a selective approach.
Some names find their cash flow under pressure from declining throughput volumes and narrowing price differentials between regional production centers. Meanwhile, the magnitude of the recent rally in the Alerian MLP Infrastructure Index suggests that the group could be due for some profit-taking by investors with a shorter time horizon.