Many areas of the stock market suffered near the end of 2012 during the fiscal cliff and tax debate arguments in Washington, D.C. Concern over regulations and changes in the tax code took an extreme toll on the master limited partnerships (MLPs), which are predominantly oil and gas related. Even though the proverbial can was kicked down the road regarding the budget and spending cuts, the taxation situation was reasonably well defined. That may be just the tailwind the MLPs need for 2013.
January has historically been the best month of the year for the Alerian MLP Index (AMZX) and January 2013 appears to have been no exception. The AMZX gained 12.63%, which would qualify as the second best January and second best month of all time, trailing only 2009, which just so happened to be the best year in AMZX history. The index posted a return of 15.25% in January 2009 and finished the year with a 76.41% return. Despite this strong start to the year, the MLP analysts at Credit Suisse Group (NYSE: CS) are forecasting a continued MLP “catch up” trade that could lead to significant outperformance by MLPs compared to the S&P 500.
MLPs underperformed the S&P 500 in 2012 for the first time since 1999, with the AMZX gaining 4.8% vs. 16.1% for the broader market. MLPs have made up some ground thus far in 2013, as the S&P 500 gained 5.03% in January vs. 12.5% for the AMZX and 9.8% for the Cushing MLP Index. With comprehensive tax reform likely off the table, Credit Suisse believes that tax fears will weigh less on MLPs. And while the analysts are still positive on the oil infrastructure MLP stocks, they also think that some of the smaller cap names and/or higher beta names such as MLP refiners or one-off newer issues as well as double-digit growers could extend the rally we have seen in January.
It is not surprising that all of their top names have strong exposure to what they see as the coming oil boom. We have represented these as being “yields” for simplification purposes, but this is a “yield equivalent” for investors as it combined a return of capital along with income. Those top names include:
- Plains All American Pipeline L.P. (NYSE: PAA) yield 4.30%.
- Magellan Midstream Partners L.P. (NYSE: MMP) yield 3.90%.
- Enbridge Energy Partners L.P. (NYSE: EEP) yield 7.30%.
- Enterprise Products L.P. (NYSE: EPD) yield 4.70%.
- Genesis Energy L.P. (NYSE: GEL) yield 4.80%.
In addition, they like all three names under the Kinder Morgan umbrella: Kinder Morgan Management LLC (NYSE: KMR); Kinder Morgan Energy Partners L.P. (NYSE: KMP) which yields 5.80%; and Kinder Morgan Inc. (NYSE: KMI).
The advantage to owning MLPs in an investor portfolio is that they often present one of the best total return opportunities. Investors seeking diversification in the space may want to look at the Kayne Anderson MLP Investment Co. (NYSE: KYN) or the more aggressive Cushing MLP Total Return Fund (NYSE: SRV). Both are exchange traded funds (ETFs) that offer a basket of MLP names.
With strong growth in domestic production and firm pricing in the oil markets, it seems possible that this sometimes overlooked asset class can return to its market leadership position.