Master Limited Partnerships (MLPs) have become an increasingly popular investment choice for those seeking steady income and exposure to the energy sector. This article will explore the advantages of investing in MLPs and discuss recent industry news and performance.
Attractive Yields and Valuations
One of the primary advantages of investing in MLPs is their attractive yields. The current yield on MLPs stands at 7.54%, which is higher than fixed-rate preferreds and broad market benchmarks for investment-grade bonds. This makes MLPs an appealing option for income-seeking investors. Additionally, the EV-to-EBITDA ratio, a common valuation metric, has decreased by approximately 20.48% since February 2022, indicating that MLPs may be undervalued and present a good buying opportunity.
Positive Industry Outlook
The outlook for the energy sector, and by extension MLPs, is positive. OPEC has revised its forecast for global oil demand growth in 2023, indicating a tighter market and potentially bolstering oil prices. The International Energy Agency has also increased its projections for global oil demand, with a projected increase in global consumption by 2 million barrels per day for the year. These factors, along with the ongoing energy policy tit for tat between Russia and the West, suggest that the energy sector and MLPs could continue to perform well in the coming years.
Steady Income and Lower Risk
Midstream MLPs, which focus on the transportation, storage, and export of oil and gas, offer a relatively low-risk way to generate steady income from the energy sector. This is due to their long-term, mostly fixed-rate contracts that don’t fluctuate with commodity prices. The Solactive MLP Infrastructure Index, which measures the performance of midstream MLPs, has increased by 17.72% since last February, demonstrating the potential for capital appreciation in addition to income generation.
Investing in MLPs through ETFs
Investing in MLPs can be made more accessible through exchange-traded funds (ETFs) like the Global X MLP & Energy Infrastructure ETF (MLPX). This fund offers a basket of midstream oil and gas companies, providing investors with higher pass-through income without needing to worry about K-1 forms during tax season. MLPX limits MLPs to less than 25% of the fund to avoid fund-level taxation, allowing more dividend and distribution income to pass through to shareholders. This ETF is a great play on North America’s significant oil and gas reserves as well as its investments in LNG exports.
Midstream Infrastructure and Renewable Investments
Midstream infrastructure will continue to be useful to transport, store, and export oil and gas for decades to come, making MLPs a long-term investment opportunity. Additionally, midstream companies are increasingly investing in renewable energy projects themselves, further diversifying their revenue streams and positioning themselves for a more sustainable future. MLPX, for example, owns a concentrated portfolio of 27 midstream energy corporations and MLPs, including the best-run, highest-quality players in the space, many of which are investing in renewable energy projects.