Master limited partnerships (MLPs) ended 2017 on a high note, with the Alerian Index up 4.7 percent for December. Our portfolio manager for MLP strategies, Todd Williams, notes the main drivers for the strong finish were the OPEC agreement, which extended production cuts further in 2018 and provided a firming and subsequent rally in crude oil prices, cold weather that helped push natural gas prices higher, and fund flows into the asset class which improved during the month.
Going forward, Williams is bullish on MLPs for these three reasons:
1. Production growth continues
2. Pro-energy administration and export growth
3. Attractive valuations
Production Growth Continues
- Crude oil and natural gas production are expected to continue growing in the coming years
- Incremental volumes should require minimal capital expenditures as the volumes flow through infrastructure already in place, driving strong incremental cash flow growth
Rig Count | Strong Projected Growth
BAKETOT Rig Count data as of December 31, 2017. Source: Bloomberg.
2018-2019 estimates from Simmons & Co. Source: Reuters.
Pro-Energy Administration and Export Growth
- Energy independence leading to rapid energy export growth, including crude oil, natural gas and natural gas liquids
- The U.S. Energy Information Administration has reported that the United States is projected to become a net energy exporter by 2026
Policy | Pro-Energy Administration, Increasing Infrastructure
Source: Strategas Research Partners.
Attractive Valuations
- Current EV/EBITDA multiples remain below longer-term historical averages
- Yields are attractive both in absolute terms as well as relative to other asset classes
Valuations | Remain Attractive
As of December 31, 2017. Source: FactSet.
