Energy Business

Can MLP Funds and ETFs Withstand MLP Distribution Cuts and Suspensions?

It turns out that the sector for master limited partnerships (MLPs) had rolled back over. It was just in the past two weeks or so that the MLP sector tried to bounce off of lows. Now the sector is reeling again after weaker oil prices and as more MLPs have begun to lower or suspend their distributions. This means lower yield-equivalents for investors, and these investors have been used to receiving high distributions.

What 24/7 Wall St. wants to know is whether the MLP sector exchange-traded funds and closed-end funds can ultimately withstand the pressure. Investors have been taught for years to believe that many MLPs could raise distributions for years and that their part of the MLP sector was safer than say exploration or production in energy. Oil is back close to $45 per barrel and investors quite simply loathe when their dividends and/or distributions get cut.

To prove a point, most key MLP asset trackers we follow have hit or challenged their 52-week lows on Wednesday. With Linn Energy, LLC (NASDAQ: LINE) now down almost 90% from its 52-week high after suspending its distributions and Memorial Production Partners LP (NASDAQ: MEMP) lowering its distribution to put its units down about 70% from highs, there are growing fears that the distribution cut trend will continue. That certainly will not be universal on dividend and distribution cuts, but the reality is that investors as a class tend to shoot first and ask questions later. Here are some updates on the key MLP trackers.

Kayne Anderson MLP Investment Co. (NYSE: KYN) is a key closed-end mutual fund that invests in and tracks MLPs. Its price performance is worse than the ETFs due to the closed-end fund having some leverage to it. Shares were last seen down 4.1% at $25.98 on Wednesday, and they had hit a low of $25.75 on the same day. That is down 37% from its 52-week high. Here is the consideration now — its yield equivalent is now nearing 9%.

The Alerian MLP ETF (NYSEMKT: AMLP) has suffered along with the MLPs as well, hitting a 52-week low of $14.64 on Wednesday. This is the most liquid of the exchange traded funds that track the MLPs, with about 5 million shares trading each day. Its dividend yield is supposed to be at least a bit more straightforward than other MLP assets as well. That being said, the currently indicated yield of almost 7.5% fluctuates more than traditional MLPs due to the timing of payouts. Shares were last seen down 2.2% at $14.69 with a 52-week range of 414.64 to $19.35.

JPMorgan Alerian MLP ETN (NYSEMKT: AMJ) hit a 52-week low of $35.51 on Wednesday, and the last price of $35.75 compared to a 52-week high of $54.13. Its dividends fluctuate of course, but that payout has been down – last seen at $0.562 for the quarter versus a peak of $0.598 at the end of 2014.

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ClearBridge American Energy MLP Fund Inc. (NYSE: CBA) holds some of the largest MLPs, and most of those have not trimmed their distributions. Still, down 3.2% at $12.16 it hit a 52-week low of $12.10 on Wednesday. That is down more than one-third from its 52-week high of $19.43. The fund also recently completed a private placement of $50 million of fixed-rate Mandatory Redeemable Preferred Stock on July 23, 2015; and those funds are earmarked for new portfolio investments and for general corporate purposes.

Unfortunately, this is one of those times were charts, research, fundamentals, and momentum may all depend upon the direction of oil prices. If oil prices head down to and look like they are going to break under $40 per barrel, let’s just say that even the MLP universe is likely to look far less immune to oil prices than even the most gullible investor might think.