The energy sector remains the worst-performing group in the S&P 500 this year, a trend that is hampering master limited partnerships, or MLPs, and the related exchange traded funds, or ETFs. What that means: It's another low oil price environment where MLPs are being pinched.
For example, the Global X MLP & Energy Infrastructure ETF MLPX is lower by nearly 13 percent year-to-date, while the Global X MLP ETF MLPA is down 15.3 percent. MLPX and MLPA are high-yielding ETFs with dividend yields of 5.8 percent and 7.4 percent, respectively.
MLPA holds 24 midstream pipeline and storage facilities MLPs and tracks the Solactive MLP Infrastructure Index. MLPX tracks the Solactive MLP & Energy Infrastructure Index and has 40 holdings.
Macro Factors Affecting MLPs
As is the case with traditional energy equities, a spate of macro factors, including production news from the Organization of Petroleum Exporting Countries, affect MLPs.
“As part of the OPEC meeting on July 25, the cartel announced two major pieces of news. Nigeria, previously exempt from the production cuts agreement, will now take part in the agreement and limit production to not exceed 1.8 million barrels a day (mb/d),” said Global X. “Current output stands at 1.6 mb/d. The second announcement was that Saudi Arabia will cut crude exports to 6.6 mb/d, lower than the 7.2 mb/d average from January to May this year.”
Many MLPs and the ETFs holding them have been in prolonged slumps. Some of the major MLP ETFs are sporting three-year losses in the area of 30 percent, mostly inline with the almost 31-percent loss by the Energy Select Sector SPDR XLE over the same stretch.
Checking MLP Valuations
With the energy sector slumping, there has been some talk of it being a value proposition, but that chatter has been met with resistance. As for MLPs, investors should check the valuations before rushing in.
“The Enterprise Value to EBITDA ratio (EV-to-EBITDA), which seeks to provide more color on the valuations of MLPs, increased marginally in July compared to June, as higher oil prices helped MLP unit prices," GlobalX said. Since July 2016, the EV-to-EBITDA ratio has increased by about 14.60 percent, according to the research firm.
Year to date, investors have remained devoted to MLPA and MLPX, as the ETFs have seen inflows of $251.3 million and $182.8 million, respectively.
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