David Fabian: The deleveraging in the energy space continues in earnest and one area that is going down with the ship is master limited partnerships (MLPs). These high yield energy-related securities fell heavily during the October sell off and are once again finding themselves in trouble over the glut of energy stock piles and plunging crude oil prices.
A quick check of the industry titan Alerian MLP ETF (AMLP) shows this $9 billion fund that tracks 25 of the largest MLPs in the marketplace has erased nearly all its gains for the year. That’s a steep slide in a relatively short period of time when the majority of these companies’ profits are based on a toll-road style business model rather than direct correlation to commodity prices.
Such is the way of the markets that tend to overshoot their boundaries when a specific sector is under fire. In the case of MLPs, they face the stigma of being energy-related AND carry a high yield component. Their tax structure allows them to pass the majority of profits to shareholders in the form of dividend payments. AMLP has a current yield of 6.6%, which was as low as 6% at the highs.
In effect, this niche area of the income-generating market is guilty by association in a credit and energy deflation environment.
The iShares High Yield Corporate Bond ETF (HYG) has been pacing steady declines as investors worry about the global deleveraging of junk bonds. Oil & Gas debt makes up approximately 14% of HYG at this time and has been a significant drag on the credit sector.
So where does this sector go from here and how can you play it?