Exchange traded funds tracking master limited partnerships (MLPs) tumbled alongside traditional energy stocks last year, but MLP funds are bouncing back in the first quarter of 2019.
MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.
While many MLPs have undergone C-corp conversions, the new trend in the industry is to eliminate incentive distribution rights (IDR) to general partners.
“As such, many remaining MLPs are moving to eliminate the incentive distribution rights (IDR) payments paid to their general partners – an under-the-radar trend within the midstream space that we consider the ‘plan B’ to a full-on C-Corp conversion,” according to Global X research.
What’s Next for MLPs?
MLPs don’t make their money based on oil or gas prices. Unlike other energy sector stocks, MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around.
“Originally, IDRs were used to incentivize rapid growth and to divert volatile incremental cash flows to the GPs, while keeping more stable ones for the LPs,” said Global X. “Yet as MLPs grew and more and more incremental cash flow went to the GPs, IDRs came to represent a significant handcuff on an MLP’s ability to fund their growth. These payments, coupled with high debt levels and low equity valuations, forced many MLPs to restructure their IDRs to free up cash flow to fund growth capex or reduce leverage.”
MLPA has a dividend yield of 8.54% while MLPX yields almost 5.10%.
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