Master limited partnerships (MLPs) have been generating solid price gains and distribution yields recently.
For a broad outlook on the sector, AdvisorOne.com turned to Ethan Bellamy (left), Robert W. Baird & Co.’s Denver-based senior MLP analyst. (Also, see the July 2011 Research Magazine Guide to Master Limited Partnerships for additional information on the industry.)
What’s your overall outlook on growth and possible risks for MLPs?
We typically think about MLPs in two ways. First, what are the prospects for and the risks for distribution growth? In that silo we don’t see any problems.
There’s a huge secular growth opportunity for MLPs that we think should drive 4 to 6% average growth for the MLP sector for the coming decade (producing) significant out-performance from an income generation and distributable cash flow generation perspective.
That’s really a derivative of the shift in domestic oil, gas and natural gas liquids resources created by hydraulic fracturing and horizontal drilling. They have massive new resources so there’s a very strong infrastructure and capital need around those domestic resources.
I don’t think that there is any real risk to that secular growth opportunity. So, for dividend or distribution increases, I think we’re pretty solid there.
On the capital side, the outlook is a little less clear. We’ve got historically low U.S. Treasury rates that are artificially low because of Federal Reserve policies.
The range of estimates for where the 10-year Treasury is going to be next year are fairly wide, but if Treasury rates move up substantially, that is a negative headwind.
The second thing is that the uncertainty with respect to the short-run and long-term deficit has increased investor concerns about potential legislative risks to the MLP asset class.
We think that ultimately they won’t receive any type of tax change. We think the sector has been very good at doing exactly what Congress intended in the late ‘80s, when the tax code was put in place — which is to foster domestic energy development, which is a positive public good.