Searching For The Next Wave Of MLP Growth. While the opportunities for NGL infrastructure and crude oil logistics investments in the “big” shale plays are widely known (e.g., Eagle Ford, Permian, Bakken, Granite Wash, Marcellus, and Utica), we believe the following could potentially represent future areas of upside (growth and/or investment) for the MLP sector: (1) a resurgence in Gulf of Mexico production, (2) Bakken NGL infrastructure, (3) improvements in natural gas pipeline and storage fundamentals based on a reduction in excess capacity, and (4) conversion of existing pipelines to crude oil service.
Tax Concerns Drive Wild Ride In November. MLPs were down 1.6% in November (as measured by the Wells Fargo Securities MLP Index), underperforming the S&P 500 Index, which was up 0.3%. Year to date, MLPs have generated a total return of 9.3%, compared to the market's return of 14.9%. Monthly performance was primarily attributable to tax driven selling as (1) investors took profits ahead of a likely increase in personal tax rates in 2013 and (2) the specter of broad tax reform and the potential for MLPs' tax status to be affected (a low-probability event, in our view) spooked the market.
Addressing Tax Concerns--Our Take. We continue to view the potential elimination of MLPs' tax benefits as a low-probability event. Notwithstanding, increased rhetoric around tax reform following the elections is likely causing some concerns among investors. The scope of potential tax reform is unknown at this time; however, one proposal floated has been the elimination (or taxation) of pass-through entities and the reduction in corporate tax rates. Again, we view this scenario as low probability given partisan gridlock in Washington, MLPs' role in the buildout of U.S. energy infrastructure, and the composition of the MLP investor base (i.e., primarily retail).
Eoin Treacy's view The MLP sector continues to represent an attractive proposition for US based investors because of the favourable tax treatment received by pass-through corporations. If that situation ever changes the sector could experience a transition similar to that which occurred to the Canadian income trust sector following a policy change. At present that looks an unlikely prospect.
The sector exhibits a great deal of variability depending on the business models of the individual partnerships and how high their respective yields are. The JPMorgan Alerian MLP Index ETN (5.36%) has lost momentum over the last year but has retained its progression of higher major reaction lows. A sustained move below the November low near $37 would be required to question medium-term scope for continued higher to lateral ranging.
The reference to potential growth in offshore production in the above report caught my attention. I reviewed a number of oil service companies in Comment of the Day on November 27 th and the relative strength of offshore drillers was a clear takeaway. This would seem to confirm the idea that interest in offshore supply is returning. I also reviewed a number of MLPs on the 27th. Some of those mentioned in the above report, with exposure to the offshore supply story, were included in that review. Of the remaining MLPs, Genesis Energy (5.42%) is one of the more interesting. It remains in a consistent uptrend and hit a new all-time high last week. A sustained move below $31 would be required to begin to question medium-term scope for additional upside.