In an article published Jan. 19, 2012, I looked at the relationship between returns of master limited partnerships (MLPs) and oil prices. It showed that while prior to 2008 the two were largely uncorrelated, reality has markedly changed over the last few years. Beginning around December 2008, the data indicates a significant positive correlation between MLP returns and oil prices. I suggested this correlation be carefully considered and taken into account in any attempt to build a balanced investment portfolio, and pointed out that if the recent pattern of close correlation continues, there appears to be a significant risk that a decline in oil will be accompanied by a decline in the per-unit prices of energy MLPs.
From Jan. 1, 2012, through June 15, 2012, the Alerian MLP Index (AMXZ), a composite of the 50 most prominent energy MLPs calculated on a total return basis, is down 4.55% while the S&P 500 is up 7.86%. In May 2012, there was a steep decline of 8.35% in oil prices. That same month, the AMZX declined 7.5%. So it is worth taking another look at the correlations and revisiting the data.
In the chart below, dollar per barrel of oil ((Bbl)), as represented by the weekly Cushing, Okla., crude oil future contract price reported by the U.S. Energy Information Administration, is plotted against the AMZX. I created the chart by indexing the price per barrel as of Jan. 1, 2009 -- the actual price was $42.04 -- to 100 and adjusting all prior prices proportionately. Likewise, I set the AMZX to 100 as of Jan. 1, 2009 -- the actual level was 428.12 -- and adjusted all prior month-end prices proportionately.
Click to enlarge images.
For the period depicted in the chart above, both Bbl and AMZX show identical appreciation (from 0.44 to 1.00). An investment in the AMZX and an investment in a barrel of oil (excluding, of course, storage and transaction costs) would have produced an identical increase in value (2.22-fold). While it's true that oil prices exhibit greater volatility, the close correlation between oil prices and energy MLP returns is apparent even without running regression analysis.
Looking at year-to-date performance (through June 15, 2012) we see the following:
I created this chart by indexing the price per barrel as of June 15, 2012, to 100 and adjusting all prior prices proportionately. Likewise, I set the AMZX to 100 as of June 15, 2012, and adjusted all prior month-end prices proportionately.
For the shorter period depicted in this chart, price per Bbl declined by 19.8% while the AMZX lost "only" 4.6%. Hence my conclusion that May could have been much worse for MLPs. Over that period, there appears to be a lesser degree of correlation between oil prices and the returns produced by MLPs. As an MLP investor, I am relieved that prices did not drop as much as they could have given recent history. But with fewer data points measured over a shorter period, this appearance may be deceiving. Even absent a full explanation for this phenomenon, it should not be dismissed lightly. I believe it should be carefully considered and taken into account in any attempt to build a balanced investment portfolio.
The table below enables comparison of the total return produced by each of the 13 MLPs I have reviewed to date for the Jan. 1, 2012, through June 15, 2012, period against the AMZX benchmark -- which, as noted above, declined by 4.55%. The 13 MLPs are as follows: El Paso Pipeline Partners (NYSE:EPB), Enterprise Products Partners (NYSE:EPD), Energy Transfer Partners (NYSE:ETP), Plains All American Pipeline (NYSE:PAA), Buckeye Partners (NYSE:BPL), Targa Resources Partners (NYSE:NGLS), Regency Energy Partners (NYSE:RGP), Inergy LP (NRGY), Williams Partners (NYSE:WPZ), Magellan Midstream Partners (NYSE:MMP), Kinder Morgan Energy Partners (NYSE:KMP), Boardwalk Pipeline Partners (NYSE:BWP), and Suburban Propane Partners (NYSE:SPH).