MLP Pipelines for Peace

Hinds Howard |

As I write this, the Alerian MLP Index is in the midst of a five-day losing streak and broke below its year-end closing price intra-day today. The index rebounded to close back in the green for the year, but just barely (+0.48 percent YTD, 1.95 percent including distributions as of 3/28/12). The chart below shows the MLP Index year to date.

Alerian MLP Index(Click to enlarge)

MLPs are down 4.8 percent from their peak in late February. That drop coincides with a bigger drop from energy stocks generally (represented here by Energy Select Sector SPDR (XLE)), which are down 6.6 percent since February 24th, compared with +2.9 percent for the S&P 500. There are a number of culprits holding MLPs down so far this year. Natural gas prices and natural gas liquids prices (NGLs) are both down sharply (as discussed here), and interest rates have risen a bit (as discussed here). All of this while the stock market has its best quarter in years, melting up more than 12 percent, which has attracted some of the fast money away from MLPs.

But the flat performance for MLPs and the blast off for stocks has come with very little volatility for both MLPs and stocks. MLPs have only had four days this quarter when the index closed 1 percent higher or lower than the prior day’s close. That number is the smallest of any quarter since the first quarter of 2007, when there was only one such day. The most such days in a single quarter was the fourth quarter of 2008 with 47 days, followed by the first quarter 2009 with 43 such days. The S&P 500 has had very few 1 percent days as well, with only 7 such days so far this year, the lowest since 2007.

Days with 1 percent Change First Quarter(Click to enlarge)

Low volatility doesn’t mean high returns. In the years when the number of days of high volatility was under 10, the MLP Index has had median total returns for the full year of 16.7 percent, compared with 35.9 percent in higher volatility years. In fact the year that saw the most 1 percent days ever for the MLP Index was 2009, which although it was volatile, saw the MLP Index rise more than 75 percent. The chart below shows the number of 1 percent days for the full year since 2000, with 2008 and 2009 as the most volatile.

Days with 1 percent Change Full Year(Click to enlarge)

This quarter, MLPs have produced total returns of 1.95 percent including distributions, which is better than a slap in the face, but it’s much less than normal for the MLP Index and much less than stocks generally. MLPs historically have done well in the first quarter. The median first quarter total return since 2000 has been 6.0 percent (as shown below), but five of the last 12 years had total returns of less than 3 percent, including this quarter. In the 4 years before that 1Q MLP returns have been less than 3 percent (2002, 2004, 2005, 2008) median full-year total return for the index was +1.5 percent, compared with +39.8 percent for the other years.

MLP Index Median Total Return 2000-2012(Click to enlarge)

Between the low return start to the year for MLPs and the lower number of high volatility days, that’s two separate, insufficient sample-sized data points that point towards weaker than usual total returns for the MLP Index for the rest of 2012. Granted, these data points are statistically inappropriate to base conclusions on, they are both indicating the same directions: towards weaker returns for the next 9 months.

If the stock market continues its benign (low volatility) upward trend, I would expect MLPs to vastly underperform for the next 9 months. However, if something happens and volatility shows up again, MLPs should catch a defensive bid and catch up to the rest of the stock market. When is defense the cheapest? When you need it the least.

Right now is a good time to re-balance into MLPs if you are feeling uneasy with the great heights stocks like Apple (AAPL) and Starbucks (SBUX) have reached, you might achieve peace of mind, by rotating into pipeline MLPs like Enterprise Products Partners (EPD) at 5 percent yield with 5.5 percent annual distribution growth or MarkWest Energy Partners (MWE) at a 5.2 percent yield and annual distribution growth above 10 percent for the next few years.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
MWE MarkWest Energy Partners LP n/a n/a n/a 0
CTSO Cytosorbents Corporation 4.90 -0.10 -2.00 305,983
AAPL Apple Inc. 109.90 0.41 0.37 26,531,242
SBUX Starbucks Corporation 57.21 -1.30 -2.22 16,870,670
EPD Enterprise Products Partners L.P. 25.38 -0.08 -0.31 3,665,909

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