06 Nov COTW: Contrarian Opportunities in MLPs
The chart below can be downloaded here.
Let’s go back to October 2014: Flows into Master Limited Partnership (MLP) funds have averaged over $1BN/month for the past 12 months, WTI crude is trading over $80/barrel, MLP yields are 4.1%, price-earnings ratios are 37x & yield spreads over Treasuries are just 200bps. With the benefit of hindsight, not a great time to be putting money to work in a capital intensive industry with high debt leverage & often poor corporate governance.
Fast forward to today: Inflows have turned into net outflows, crude is at $56/barrel, MLP yields are over 7.5%, PEs are in the low 20s & yield spreads over Treasuries are 530bps. More importantly, we believe the current pricing environment will result in better corporate governance & more sustainable business models. We think now is a better time to look at MLPs.
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