MLPs have had a disappointing quarter and year thus far. As of June 16, 2017, the Alerian Total Return Index is 9.2% lower for the quarter and 5.62% for the year. We believe the yield on the Alerian Index of 7.37% as of that date versus the 10-Year US Treasury bond of 2.152% (source Bloomberg) or 522 basis points is an attractive valuation
The energy sector in general has been struggling despite OPEC attempting to stabilize supply. We expect US product volumes to increase in the second half of this year as shale production in the US rebounds. That will help MLP operating metrics. However, market participants are nervous that the energy sector has not yet stabilized. We believe there is long run value in MLPs but we are still cautious near term, as we do not see strong catalysts to higher valuations yet in midstream companies.
Our long run optimism rests on self help happening in both the midstream energy space, where assets and balance sheets continue to be rationalized. The broader energy sector has also been streamlined and has greatly reduced its break even costs for production. Until demand catches up to supply we do not see a near term catalyst to significantly higher prices in midstream. Investors continue to benefit from high cash flow yield from MLP investments so we would continue to recommend holding MLPs as part of a diversified portfolio
By Richard Daskin