MLPs: This Time Is Different

It’ll be no surprise to MLP investors that the correlation of our asset class with crude oil has been rising. Falling crude in 2015 led MLPs to drop 58.2% from high to low, a figure we won’t soon forget. That same institutional memory among investors is imposing a similar relationship today. Last time, lower oil led to lower U.S. production, posing challenges for midstream infrastructure businesses with surplus capacity. This time, higher U.S. production is leading to lower crude prices. In This Time Is Different, Reinhart and Rogoff take readers through the many financial disasters that befell investors who thought it was different. And yet, with due deference to the aforementioned luminaries, we think it is.

Last week we received more questions than usual from investors reviewing the mark-to-market damage inflicted by their MLP allocations. One investor noted that MLPs were responsible for fully all of the YTD losses in one model portfolio they run. If you’re wondering whether the relentless sellers possess an insight you’re missing, you have plenty of company. Higher production of hydrocarbons in the U.S. is bad for lots of players including OPEC, but it’s hard to fathom why it’s bad for the domestic infrastructure that supports the Shale Revolution. American shale oil output is on track to grow by 1 Million Barrels a Day (MMB/D) annually. Shale output of 5.4 MMB/D is now more than half of total U.S. oil production of 9.3 MMB/D, in a global oil market that’s producing 98 MMB/D. Furthermore, the fact that U.S. shale producers are growing production at ever lower costs is more likely bad for the other 95% of global producers.

The market is failing to differentiate U.S midstream energy companies that benefit from this growth in market share from the rest of the global energy losers. At the annual MLPA Conference in Orlando a few weeks ago, MLP managements were similarly puzzled by the weakness in their stock prices. But they were far less worried than most investors, because they generally don’t need to tap the capital markets much to finance their growth plans.

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