Investor attention in all-matter of “yield-oriented” asset classes have surged years given the Federal Reserve’s continued ZIRP-stance on interest rates, but perhaps none as much as master limited partnerships (MLPs). These high-yielding and tax-advantaged investments have produced staggering returns over the last few years.
That is, until the Fed began its tapering talk.
Since that time, shares of MLPs have tanked- leading many investors wondering if their best days are behind them. However, according to leading investment banks, the best time to reload on shares could be now.
SEE: Discover Master Limited Partnerships
Still Plenty Of Upside
So far, the benchmark Alerian MLP Index – as represented by the E-TRACS Alerian MLP Index ETN (ARCA:AMU) -has gained roughly 20% through June 7, versus 16.3% for the broad S&P 500. However, as the Fed has begun raising the possibility about ending its quantitative easing (QE) programs and raising rates, the pipeline and energy infrastructure index has fallen about 4% from its recent highs. Which makes it a perfect entry point according to analyst’s investment bank at Credit Suisse (NYSE:CS).
Credit Suisse points to rising energy production across the U.S. as the number one reason to still be bullish on the sector. Fundamentals remain strong, as hydraulic fracturing and advanced drilling techniques continue to spread across North America’s shale formations. That’s causing daily production numbers -particularly in the oil and natural gas liquids (NGL) spaces- to skyrocket. Moving all that crude oil and natural gas from regions like the Bakken and Marcellus will take some serious pipeline muscle. Overall, that’ll boost revenues for the operators of such vital infrastructure assets.
As for dreaded rising interest rates, Credit Suisse says not to worry. According to the bank’s research, MLPs will continue to outperform in rising rate environments. The most recent period of rising interest rates in the past 20 years- between mid-2004 and mid-2007- MLPs still managed to outperform both the S&P 500 and yield-oriented assets classes like utilities and bonds.
Adding this historical performance back into the rising energy production and the need for more infrastructure, Credit Suisse says investors should seriously consider reloading on their favorite names in the midstream sector.
SEE: Guide To Oil And Gas Plays In North America
Who To Buy?
Given the sectors recent fall and Credit Suisse’s bullishness, now could be the best time to reload or add MLPs to a portfolio. The $5.9 billion JPMorgan Alerian MLP Index ETN (ARCA:AMJ) remains the go-to broad investment in the space. However, Credit Suisse’s own MLP fund may be a better bet.
The Credit Suisse Cushing 30 MLP Index ETN (ARCA:MLPN) tracks 30 of the largest MLPs- including Access Midstream (NYSE:ACMP) and ONEOK (NYSE:OKS) –and equally weights them. This strategy helps smooth-out the portfolio and prevents anyone firm from “taking over the fund” as they grow in size- or conversely shrink. That strategy is working as the fund yields 4.68% has produced double-digit returns over since its inception back in 2010 of 47.25%.
For those looking for individual picks, Credit Suisse has several suggestions as well.
A prime pick, according to the investment bank is Targa Resources Partners (NYSE:NGLS). The firm has a unique blend of both midstream and downstream or processing assets in the natural gas sector. As more wells have been tapped in the firm’s key operating areas, Targa has been able to steadily increase its distribution by 10% to 12% per year. Shares of the MLP currently yield 5.7%, while its general partner Targa Resources Corp. (NYSE:TRGP) currently pays 3%.
Another prime pipeline pick could be MarkWest Energy Partners (NYSE:MWE). The company has primarily focused its attention to the natural gas rich Marcellus and Utica shales. Most recently, the company sold 40 miles worth of non-core pipeline assets to Summit Midstream (NYSE:SMLP) for $210 million. That extra cash infusion will be used to expand out its network of midstream assets in the more valuable processing sector. MarkWest expects to have more than 4 billion cubic feet per day of processing capacity and 275,000 barrels per day of fractionation capacity by end of 2014. MWE currently yields 5%.
SEE: 5 Biggest Risks Faced By Oil And Gas Companies
The Bottom Line
Interest in MLP has waned over the last few weeks as the Fed has hinted at winding down its QE programs. However, according to investment bank Credit Suisse, now could be the best time to add the sector to a portfolio. Given the bullish energy production numbers in North America’s shale formations, investors should follow suite.
At the time of writing, Aaron Levitt did not own shares in any of the funds or companies mentioned in this article.
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