No High-Yield Relief for MLP ETFs Post Fed.Conventionally high-yield securities MLPs, , are now having a bloodbath

which are normally stable in nature too

 

Oil Price Slump Hurts

 

1216, 2015

 

The Fed is perhaps on the verge of hiking the short-term interest rates after almost a decade and investors are probably looking for high-yield but stable investing tools to weather the prospective bounce in the U.S. Treasury yields, but this search will not be easy now. Investors need to be very careful while picking high-yields securities in the present market condition.

 

This is because of the fact that the Fed hike is not the only threat to the market, a below-$40 oil price seems to be the main culprit now. As a result, conventionally high-yield securities MLPs, which are normally stable in nature too, are now having a bloodbath (read: Is This the Worst Time For MLP ETF Investing?).

 

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.

 

Oil Price Slump Hurts

 

Now oil prices are in a freefall and hovering around a seven-year low following the prospect of more production from OPEC nations amid supply glut and falling demand. So energy MLPs are being crushed. Now, Russia’s deputy finance minister expects oil price to range between $40 and $60 per barrel in the next seven years. So one can easily expect how prolonged the pain could be for the MLPs.

 

As you may know, MLPs often operate pipelines or similar energy infrastructures that make it an interest-rate sensitive sector. This group catches investor eye as the players in it do not pay taxes at the entity level and hence must pay out most of their income (more than 90%) in the form of dividends. Investors looking for higher income levels outside the traditional bond sources generally bet on these products.

 

Rising Rate Scenario: A Pain

 

A rising interest rate environment would also adversely impact the performance of MLPs for a number of reasons. First, higher interest rates lower the appeal of high-yielding stocks such as MLPs, which have historically offered around 5% in yields and hence have 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 (read: Time for These Surging High-Yield MLP ETFs?).

 

Dividend Cuts

 

 

Also, thanks to the oil rout, the cash position of MLPs is weakening. Upstream exploration MLP companies earn from every barrel of oil and are being thrashed by the endless weakness in oil prices. U.S. oil producers are resorting to a cutback in oil production in response to falling prices. Since pipeline operators are heavily dependent on them, a blow to the MLP balance sheet is inevitable.

 

The situation is so acute that street.com indicated a few MLPs which may cut dividend – the sole lure of the MLP investing – in the near term. Already the largest energy infrastructure company in North America – Kinder Morgan, Inc. (KMI) – cut its dividend by 75% on December 8 (read: Is the Kinder Morgan Plunge an Opportunity to Buy Its ETFs?)

 

The author in the street.com believes that Targa Resources Partners (NGLS - Snapshot Report) and Vanguard Natural Resources (VNR - Snapshot Report), which yield about 20% and as high as 55%, respectively, may resort to a cutback in the coming days. Crestwood Equity Partners (CEQP - Snapshot Report) is yet another mid-stream MLP which yields about 38.52% annually in dividend, but is in the danger list.

 

Others are NGL Energy Partners (NGL - Snapshot Report) presently yielding 26.42% and NuStar Energy (NS - Analyst Report) with a dividend yield of 13.05% at present that may not be able to sustain the same payout in the coming months due to financing issues.

 

ETF Impact

 

All these have kept the MLP ETFs space depressed, each losing in the range 15% to 30% in the last one-month frame (as of December 14, 2015). Year to date, these products have lost in the range of 22% to 55%. InfraCap MLP ETF (AMZA - ETF report), Yorkville High Income MLP ETF (YMLP - ETF report) and Cushing MLP High Income Index ETN (MLPY - ETF report) were the worst hit during the last one-month frame.

 

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