A Macro View: Midstream is still Mainstream
Envestnet | PMC had an asset manager in our Denver offices this week to provide an overview of the energy and Master Limited Partnerships (MLPs) landscape. Towards the end of the meeting they had a question for PMC: “What are your clients asking you about MLPs?”
As one of the only client-facing representatives in the room, all eyes turned to me. “Honestly, I can’t remember the last time a client reached out to discuss the MLP space,” was all I could offer.
Although it may not have been the answer they were hoping to hear, it did spark an interesting follow-up discussion. Why aren’t clients asking about MLPs, and what potentially could cause that to change?
There was a time when MLPs were a drop in the bucket. As recently as the mid-1990s, the market cap of the entire MLP universe was a mere $7 billion1. Times have changed. Today, MLPs represent roughly $400 billion in total market capitalization, accounting for roughly 1.5% of the entire US equity market1.
Interestingly, this is not exactly a new phenomenon, and it is probably not a secret to most industry professionals. It was not too long ago that MLPs were the talk of the town. In 2014 and 2015 there were 26 MLPs that held their initial public offering (IPO)1 – a monumental leap, considering that there are 108 MLPs out there today2. During that time, if I were asked the same question I was asked during this week’s meeting, I would have had a long list of conversations with clients to pull from.
Unfortunately for MLP investors, the asset class took a sharp dive in 2015, to the tune of -32.59%, according to the Alerian MLP Index, and IPO activity slowed significantly the following year (despite an 18.31% recovery). MLPs haven’t made many headlines since, and seem to have fallen off the radar for many retail investors.
Some of the concerns surrounding MLPs are not unreasonable. If investors take a long-term viewpoint, they see an oil and natural gas industry that is likely to be replaced—to some extent—by alternative energy sources. Despite the US’s withdrawal from the Paris Climate Accord, we are seeing an active global push to combat global warming and the burning of fossil fuels. If those highlevel ideals come to fruition, and the demand for fossil fuels slows, so will their transportation, processing, and storage – the key businesses that MLPs comprise.
However, in the short term (at the very least), MLPs remain an attractive asset class in many ways. Over the past 15 years (ending December 31, 2016), MLPs have significantly outpaced the broad US equity market on an absolute basis, with only marginally higher volatility1. They also provide diversification benefits—exhibiting low correlations to the broad US stock market, the energy sector, commodities, and crude oil prices. The results are hard to ignore.
Regardless of your view on the current fundamentals or the long-term outlook for MLPs, it is important to keep MLPs in mind when building portfolios. These midstream players are still mainstream within the global capital markets and should be treated as such.
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1 Alerian, Figures and Tables, Data as of December 30, 2016
2 Alerian, List of MLPs, Data as of June 21, 2017
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