The Business of Energy Distribution

 

View from the Observation Deck

  1. Master Limited Partnerships (MLPs) are designed to distribute nearly all of their revenues to shareholders.
  2. The vast majority of MLPs are energy-related, with a focus on distribution and storage activities.
  3. The Alerian MLP Index is comprised of 50 energy MLPs. Its current distribution rate is around 6.20%.
  4. The chart shows the price movement of the Alerian MLP Index relative to the fluctuations in the prices of crude oil and natural gas over the past five years.
  5. The takeaway from the snapshot above is that there is not a direct correlation, as evidenced by the period leading up to the date of 5/22/08.
  6. Oil and natural gas prices spiked, but MLP prices did not even budge.
  7. From 5/22/11-5/22/12, the price of natural gas was cut by half, but the Alerian MLP Index posted gains over the bulk of that 12-month span.
  8. MLP prices tend to be driven more by the demand for the commodity, rather than its price. Higher demand can translate into bigger distributions from MLPs.
  9. Investors considering MLPs for their portfolio should monitor the strength of the U.S. economy. Stronger economic activity should translate into higher demand for energy resources, and vice versa.
Posted on Thursday, May 24, 2012 @ 4:18 PM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.