It’s been just over a year since everyone’s favorite yield-producing asset class, MLPs, took a nose dive following energy prices off the proverbial cliff. A year after we “Looked Under the MLP Hood”, it’s high time we circled back to see what’s going on in the oil services patch. Here’s an overview of where MLPs had been, went, and are now:
(Disclaimer: Past performance is not necessarily indicative of future results)
Source: Alerian
From its 2014 highs to the resulting valley in 2015, the MLP index’s lowest point was down -58.07%. How have they fared with oil bouncing back some – how about still down -35% from the highs. {past performance is not necessarily indicative of future results}. That’s a lot of 7% annual yields needed to just break even.
If you don’t know what an MLP is, check out our post here, or check out Alerian’s masterful infographic. From a 10,000 foot overview, the reason there’s $490 Billion in total market capitalization of MLPs is because of the high yields they are able to provide to investors. For example, check out how much yield Alerian produces compared to the S&P or REITS.
Basically – the sell was/is – buy these MLP things, and you’ll yield 6% to 8% a year and get all the upside from the energy sector. That’s all well and fine if there is an upside to the energy sector. It can be quite painful when that upside suddenly disappears. If your one trick pony needs energy prices going up, it can be tough when energy prices don’t have a good track record the past two years. But energy prices have stabilized, risen dramatically from their lows. How have MLPs fared in comparison:
As you can see, MLPs saw a bit of a delay in their reaction to energy prices in 2014, as many of them are toll collectors of sorts without direct exposure to energy prices. But as 2015 and 2016 showed when they became highly correlated to energy prices, that toll collector theory only goes so far, with investors realizing lower prices can mean lower margins, lower demand for drilling and services, and all the rest. And we couldn’t help but take a shot here at $USO one more time , showing that it was the worst way to get exposure once again.
But no matter how you look at it; MLPs, Crude Spot, and the ETF $USO are still in drawdowns from the fall off in crude prices more than two years ago. Sure, it’s been a nice bounce in Crude Oil, along with MLPs have stabilized – but that’s a lot of yield payments to make up for still being down -20% to -30%. For our money, we’d rather have energy sector exposure via a long/short strategy which can capture both up and down moves.
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