We believe MLPs continue to represent value for patient investors seeking income and moderate growth in a tax-advantaged form. The first quarter was still a difficult one for Master Limited Partnerships (MLP), however. MLP total returns for the quarter were about -6%, as of March 20, using the Alerian total return as a benchmark.
Energy prices are still exhibiting price volatility, making rising valuations in midstream MLP assets unlikely in the very short term. In contrast to partnerships’ recent price performance, we still expect distributions to grow in 2015, except for energy MLPs that are direct producers of oil and gas (upstream companies). As a result of this outlook, the Cumberland Advisors’ MLP strategy does not presently own any of these types of partnerships.
Growth rates for midstream companies are expected to slow down over the next several years as some new infrastructure projects are either delayed or in some cases cancelled. Please note that we are not forecasting distribution cuts, but we are forecasting a slower growth rate for partnership distributions over the near term. Assuming energy prices find some sort of bottom this year, our base case is for partnerships’ valuations to improve in line with future distribution growth.
There are several factors in the MLP space that are worth mentioning. In natural gas, over the intermediate term, we expect increasing demand from electric generation, new petrochemical plants under construction, exports, and general economic and population growth. While supply growth is robust, we believe that the oversupply in the natural gas market will be corrected over the intermediate term. The natural gas midstream business has a bright future in our view over a two- to five-year time frame.
Our outlook for crude oil and refined products transport is perhaps somewhat more circumspect, but we do believe there will be opportunities in the space for partnerships to take advantage of price differentials and growth opportunities once energy markets stabilize and possibly move up.