Scalper1 News
The double whammy of the recent crash in crude oil price below $40 and the Fed’s hawkish stance on interest rate hike are causing mayhem in the master limited partnership (MLPs) business. MLPs are involved in the business of transportation and storage of oil and gas, and they are suffering even more than the oil producers from the downturn in the market. MLPs primarily benefit from an uptick in oil production. However, U.S. oil producers are resorting to a cutback in oil production in response to falling prices. Oil drilling companies have idled over half their rigs from last month. The latest data from Baker Hughes Inc. (NYSE: BHI ) revealed that rigs engaged in the exploration and production of oil and gas totaled 767 for the week ended November 13, 2015, a decline of 4 from the prior week’s count and the lowest level seen since April 2002. The nationwide rig count is still less than half the prior-year level of 1,928. Despite a marginal rise to 574 last week, the oil rig count continues to be on the low end of the five-year range and is significantly below the previous year’s level of 1,578. International Energy Agency (EIA) has also reduced U.S. production outlook for 2016 by 1% to 8.77 million barrels per day. Some might think that the oil price is hitting its bottom but in reality it might head further south. This is because EIA has indicated that the global supply glut could get even worse as global stockpiles have reached the record level of 3 billion barrels owing to abundant supply from the OPEC countries as well as Iraq and Russia. Secondly, a strengthening U.S. dollar supported by the possibility of an interest rate hike weakens the demand scenario for greenback-priced commodities such as crude. A rising interest rate environment would also adversely impact the performance of MLPs for a number of reasons. Firstly, higher interest rates lower the appeal for high-yielding stocks such as MLPs, which have historically offered around 5% in yields and hence attracted investors’ attention due to ultra-low interest rates. Secondly, MLPs heavily depend on external financing to run their operations as they distribute most of their income as dividends. As a result, a rise in interest rates would increase their financing costs, which in turn would diminish their ability to keep distribution payments at the existing level. The adverse developments in the oil and gas sector and the threat of a looming interest rate hike are heavily weighing on MLP stocks and ETFs and indicate the worst may not be over yet. Below we highlight three MLP-based ETFs that have witnessed double-digit fall so far this year and may continue to experience a downspin in the near future as well. Alerian MLP ETF (NYSEARCA: AMLP ) This is the most popular MLP ETF with AUM of $7.3 billion. It tracks the Alerian MLP Infrastructure Index, measuring the performance of 25 energy infrastructure MLPs. The fund’s top three holdings include Enterprise Products Partners LP (NYSE: EPD ), Magellan Midstream Partners LP (NYSE: MMP ) and Energy Transfer Partners LP (NYSE: ETP ), together accounting for 25.4% of assets. The ETF trades in a solid volume of 7.1 million shares per day and is very expensive with 5.43% in expense ratio. It offers a robust dividend yield of 9.3% and has lost around 27% in the year-to-date timeframe (as of November 18, 2015). Credit Suisse X-Links Cushing MLP Infrastructure ETN (NYSEARCA: MLPN ) MLPN follows the Cushing 30 MLP Index, measuring the performance of 30 mid-stream stocks in North America. The note is well distributed with its top 10 holdings comprising around 35% of the assets. It has an AUM of $505 million and exchanges roughly 192,000 shares in hand per day. MLPN charges 85 bps in annual fees and has a dividend yield of 6.8%. The note tumbled nearly 34% so far this year. iPath S&P MLP ETN (NYSEARCA: IMLP ) IMLP tracks the S&P MLP Index measuring the performance of MLP stocks that are classified in the GICS Energy Sector and GICS Gas Utilities Industry. Enterprise Products Partners, Energy Transfer Equity LP (NYSE: ETE ) and Energy Transfer Partners are the top three holdings in the fund with a combined exposure of nearly 35%. The product has amassed around $413 million in assets and trades in a moderate volume of roughly 97,000 shares per day. It charges 80 bps in investor fees and offers a dividend yield of 7%. IMLP shed 31.6% in the year-to-date timeframe. Original post . Scalper1 News
Scalper1 News