Another way this gets forgotten is investors’ practically panicked concern that electric vehicles are going to wipe out all value in MLP investments—by tomorrow. We wrote an entire article on electric vehicles, but let me explain even more why Tesla production numbers shouldn’t be inversely correlated with MLP prices. Worldwide, there are one billion vehicles on the road, and only two million electric vehicles, or 0.02% of the total fleet. If the Paris targets are hit, then in 2035, there will be 100 million EVs against 1.8 billion total vehicles, or 5.5% of the global fleet. The internal combustion engine is not that easily forgotten. Plus, electricity doesn’t magically appear out of the air. More US electricity is generated by natural gas fired power plants than by any other source. So, those investors wanting a second- or third-derivative way to play the electric vehicle theme should be investing more money in natural gas MLPs, not less.
Money Flows Bely Sentiment
As the old quip goes, when the market’s moving down, there are more sellers than buyers. However, looking at asset flows, at least into products, shows demand is still there. For 2017, an average of $350-$400 million has flowed into MLP ETFs and mutual funds every month. Drilling down further to the largest MLP ETF: the Alerian MLP ETF (AMLP), there have been fund flows of roughly $1.4 billion in the first nine months of the year.
Some of this move is likely a shift of money from closed-end funds into more transparent products or products without leverage. Some investors may be taking tax losses in individual names early this year and moving funds into broader, more diversified products. Others may be making their first MLP allocations ever.
Beyond retail investors, private equity money has been active in MLPs and will likely provide a floor for valuations. For example, this summer, Blackstone bought a 32.4% stake in the unfinished Rover Pipeline from Energy Transfer Partners (ETP) for $1.57 billion. Private equity has a longer-term holding period, so given that flexibility, their management teams have decided that this space and its assets are attractive at these levels.
The Base Case Is Worth Something
When MLPs trade down near these levels, it’s time to ask the hard question: Is the price decline merely an overreaction by panicked sellers (or those with other motivations such as tax loss harvesting), or is this the warning shot of something far darker—that MLPs will be unable to operate profitably in the future?
MLPs are equities operating in a niche space with a steep understanding curve, which can cause volatility. The global economy is more connected than it has ever been so every asset class is more correlated than it has ever been. When and if a broader market correction comes or if commodity prices again fall, market sentiment is going to carry MLPs down with it, though maybe not as far given how far they have already fallen. The risks of investing in MLPs remain.
If you believe that (1) US energy demand will remain relatively constant in the next few years, and (2) renewable energy will not overtake natural gas and petroleum usage in the US, and (3) that the long-term contracts MLPs have signed will remain in place and continue to generate cash flow for transportation, storage, and processing of hydrocarbons, well, it logically follows that the value proposition of being invested in MLPs is relatively unchanged from one or three or five years ago. If you’re invested in MLPs now, you’re here because you have faith in the thesis, you recognize the risks and volatility, and you like that 4%-8% yield you’re paid while you wait for the midstream world to make sense again.