Analysts still expecting good things from MLPs

Following the National Association of Publicly Traded Partnerships (NAPTP) conference in Orlando, Florida, last week, industry analysts are signaling cautious optimism over the future of the MLP market. Although the road ahead looks less than rosy, with Goldman Sachs predicting oil prices could fall back to their $40 lows, a stronger than expected first quarter and continued growth have set the stage for a more bullish outlook in the MLP market.

The entire oil and gas industry took a major hit following the rapid decline of oil prices that started in November of last year, but MLPs managed to take the first quarter in stride. “A majority of the midstream players reported better than expected earnings for the first quarter,” said a note from Sunil Sibal of Global Hunter Securities. Additionally, the recovery in oil prices from their lows in early March helped breathe new life into the E&P players of the MLP sector.

The analysts at Raymond James also noted that despite a 3% year-over-year decline in the Alerian MLP Index, the current 123 energy-focused MLPs in the index now represent about $500 billion in market capitalization, largely flat versus year-end 2014. “Many MLPs have opportunistically raised capital since the start of the year,” the note said. “When including the approximately $330 billion in ‘other assets,’ aggregate market cap balloons to about $830 billion, nearly on par with the estimated total market capitalization of publically traded Real Estate Investment Trusts (REITs).”

Not out of the woods yet

While many are hopeful that the unexpectedly healthy first quarter for MLPs will continue through the rest of the year, Sibal noted that many MLPs are still downwardly adjusting their capex budgets. While volume commitments remain unclear, many midstream players will continue to offer “guarded optimism,” says Sibal.

On top of the uncertainty around future production, the IRS recently released a new proposed rule on qualifying income for forming MLPs, leaving experts on opposite ends of the spectrum in terms of what it might mean for forming MLPs. Maria Halmo, Director of Research for the Alerian Index, told OAG360® that the proposed rule “absolutely” offered the clarity that was lacking before the proposed rule, while Senior Analyst Ethan Bellamy of Robert W. Baird & Co. said the new regulations were “clear as mud.”

“The only thing [the proposed ruling] clarifies is that billable hours at law firms handling MLP qualification issues are headed up,” Bellamy told OAG360®.

Despite the uncertainties swirling around the MLP sector, analysts remain optimistic, but say it is best to maintain a defensive posture. “Over the longer term, we believe that the continued development of energy infrastructure will be necessary in supporting the secular growth story of North American unconventional resource plays,” said the note from Raymond James. “However… this secular bull trend won’t be without some bumps and bruises along the way.”

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