It’s been a relatively good year for master limited partnerships (MLPs) compared to the overall stock market. Through early October , the S&P MLP Index has produced a total return of -2.71% versus the S&P 500 Index’s -7.6%.
On a price-only basis, MLPs are down -6.88% versus the S&P 500’s -9.03% result for the same period. MLPs continue to generate high distributions, and the long-term outlook for their profitable role in the energy supply chain is strong.
That doesn’t mean MLP investors can put their portfolios on autopilot, however, because the potential risks of fracking continue to gain attention.
Ask the average American for his or her opinion on fracking’s risks and you’ll likely get a blank stare unless the respondent lives near an oil or gas field. Fracking is shorthand for hydraulic fracturing, which Wikipedia defines as “the process of initiating and subsequently propagating a fracture in a rock layer, by means of a pressurized fluid, in order to release petroleum, natural gas, coal seam gas, or other substances for extraction.”
A less technical definition is that millions of gallons of high-pressure water, sand and proprietary chemicals are injected into a well. The pressure fractures the shale rock, creating fissures so the trapped natural gas can flow freely out of the well.
The process has been a boon to the energy industry—and MLPs—and there is research showing that fracking’s environmental risks are manageable. Nonetheless, there is a growing anti-fracking movement that claims fracking pollutes groundwater. A 2010 documentary, Gasland, generated controversy and brought national attention to fracking. Leaders in Philadelphia, New York City and Pittsburgh have voted to restrict drilling in and around their cities.