We're In A New World For MLPs

Master Limited Partnerships are in a recovery mode following nearly 16 months of decline, according to a note from Pointe Capital Management.

The note said though the Alerian MLP total return index (AMZX) started the new year with a 25 percent drop, it finished the March quarter essentially flat (-0.48 percent). The index posted a strong rally beginning on Febraury 11 and rose 33 percent by the end of the quarter.

However, the asset manager noted that the index remains about 50 percent below its peak in September of 2014 and past business model based on $100 oil price, unlimited access to cheap capital and nearly unlimited growth opportunities "is now badly out of date."

"While the recovery is certainly good news for the group, we believe that the investment playing field for MLPs has changed significantly," Pointe Capital wrote.

According to the note, MLP business model has witnessed some changes and that include reduced leverage, higher distribution coverage and slower distribution growth.

The asset manager added that compared to other sectors, MLPs are now slightly more expensive than integrated utilities, but cheaper than most regulated utilities.

Pointe Capital said it sold all holdings in Williams Companies Inc WMB, Enbridge Energy Partners, L.P. EEP and Summit Midstream Partners LP SMLP. The firm's new positions include Equitable Midstream, Magellan Midstream Partners, L.P. MMP, Oneok Partners LP OKS and Williams Partners LP WPZ.

"We believe the longer term outlook for the midstream MLP asset class is positive and acknowledge that volatility is likely to continue in the immediate near term," the note said.

"We do not claim that valuations alone will act as the catalyst to get the group moving higher, but we take the position that MLPs have underperformed more than warranted by company fundamentals and believe investors will ultimately be rewarded for their patience with any stabilization/improvement in oil and natural gas markets," Pointe Capital added.