The Alerian MLP Index is up strongly YTD and has broken a multi-year downtrend
Value and dividend themes have been relative winners this year
Investors continue to put a premium on owning cash flow generators
Longer-term, a dearth of energy capex and high commodity prices should support the MLP industry
Investors remain thirsty for yield even with government bond rates climbing around the world. The best-performing sectors and styles in 2022 have generally been those featuring high payouts to shareholders. Consider that Energy, Staples, Utilities, and Real Estate are top of the pack as value re-asserts itself. There is a lot of nuance to this trade as a key theme has been investors flocking to firms that generate strong current free cash flow.
Riding the Free Cash Flow Wave
Another way to play the general trend toward value, energy, and high dividends is via the Alerian MLP (master limited partnership) index. There are ETFs that offer exposure to that index. A popular one is, not surprisingly, the Alerian MLP ETF (AMLP). It is the biggest fund by AUM, at nearly $7 billion, in the category and is up about 20% so far this year even with a sharp recent correction.
The fund is chock full of US midstream energy plays. With high but somewhat stable oil prices and still-soaring natural gas prices, owning a fund dedicated to high-payout energy firms appeals to many investors. MLPs operate the infrastructure needed to grow energy production. These companies are vital to the transportation, storage, and processing of energy commodities. The ETF yields more than 7%, too. So MLPs hit on a few key current themes. Also consider that now more than ever, energy independence is seen as a barometer of national security and economic stability.
We remain bullish on energy stocks as a whole over the coming one to three years. Valuations are attractive now that commodity prices are up big while investors are still not exposed much to the space. Moreover, the group features improved relative strength versus a few years ago. Overall underinvestment in commodity infrastructure might also provide a tailwind to MLPs in the years ahead should energy capex return to its former glory.
Featured Chart: AMLP Breakout
Our featured chart illustrates AMLP’s breakout. After notching a capitulation low in early 2020, prices rebounded sharply after crude oil prices hit minus $40 two years ago. Perhaps more intriguing is price action just in the last several months: following the near-term peak in mid-2021, the index consolidated before vaulting to new highs this year. While there is overhead resistance on the chart, the downtrend off the 2017 peak has been broken. Near-term, a recent 10% drop could offer a decent entry point.
Bottom Line: We prefer value to growth right now and are also bullish on global energy capex, particularly in the commodity and infrastructure arenas. AMLP is a compelling way to play it for those seeking US exposure.
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