Yield spreads are a fairly blunt instrument for measuring the relative attractiveness of the individual partnerships. We typically use it as a quick screen or cautionary flag in evaluating investments. A key issue is that the metric is only valid if the past is prologue. Part of the positive/negative skewing we see in the array summarized in Figure 8 is the fact that individual and subsector fundamentals have changed. For instance, two-thirds of the names selling wider than history are involved in the crude/NGL infrastructure business.
Both pieces of the value chain have gone from shrinking volume, games of attrition, and consolidation focused markets to being at the forefront of the need for new capacity. Propane, interstate gas, gas storage and coal dominate the ranks of historically “cheap” partnerships as the fortunes of these subsectors, with the exception of propane (secular decline in usage) have changed with the shift from dry gas to wet gas or liquids drilling. As a result of these changes in operating environment, we are less hesitant to pursue a strategy that predominantly selects historically expensive names in our highlighted group of names.
Eoin Treacy's view Master Limited Partnerships have become the darlings of yield hungry investors both because of their impressive regular payouts and the favourable treatment they receive from the US tax authorities. Since they primarily focus on energy infrastructure, the sector offers an excellent avenue for those seeking to benefit from the boom in US unconventional oil and gas production. (Also see Comment of the Day on February 14th).
While a high degree of commonality was evident in the sector until last year, as explained in the above report, each company now needs to be appraised on its individual merits.
Having rallied impressively from their 200-day MAs Enterprise Products Partners (4.87%) and Plains All American Pipeline (5.01%) hit new all-time highs and had become temporarily overextended. They are in the process of reverting gently towards their means but sustained moves below them would be required to question the consistency of their medium-term uptrends. Magellan Midstream Partners (4.85%) is becoming increasingly susceptible to mean reversion.
ONEOK Partners (4.62%) has been ranging mostly below $90 since December and has unwound its overbought condition relative to the 200-day MA. A sustained move below $50 would be required to question the consistency of the medium-term uptrend.
Western Gas Partners (4.2%) and Teekay LNG Partners (6.65%) found support in the region of their MAs over the last couple of weeks. Teekay Offshore Partners (7.16%) has been ranging mostly below $30 for 18 months. It has held a progression of higher reaction lows since October and a sustained move below $26 would be required to question medium-term potential for a successful upward break.