By Richard Daskin, CFA, CFP, MLP Sub-advisor
This quarter, master limited partnerships (MLPs) have continued to focus on repairing balance sheets and seeking opportunities to lower costs and future capital spending, while continuing to finish projects currently under construction. There have been some acquisitions of both MLPs and deals involving projects; however, this has not been the dominant theme in the midstream space to date. The most important news in the quarter was the agreement by OPEC and some non-OPEC suppliers to limit oil production in order to balance supply and demand and to bring inventories back to a more typical level. Saudi Arabia and OPEC reversed their goal of taking market share and are now focused on attaining better supply/demand balance and putting a more stable floor on oil prices.
Because US-based shale producers have continued to reduce costs and improve productivity, the lift in prices to the $50 range has made some of the better US shale oil plays more economical to develop. Rig counts are going up in these basins; and if this trend holds, we can expect more demand for transportation infrastructure in the future. The demand for this takeaway capacity often lags increased drilling activity.
The natural gas market continues to see improvement from increased demand for natural gas as a fuel for power plants, as well as from continued development of export capacity. Increased demand from chemical plants on the Gulf Coast is now on the horizon as well. We have also seen increased scrutiny of new pipelines by regulators and the general public. This may change in certain cases when the new president-elect formally takes office in January. Through December 9, 2016, MLPs have underperformed the S&P 500 (NYSEARCA:SPY) and have notably lagged the broad Energy sector (NYSEARCA:XLE) as investors have sought to invest in the sectors most exposed to the price increases in oil, such as oil services companies and exploration and production companies.
We are still generally positive on the MLP sector, although we note some headwinds, such as higher interest rates and tightening financial market conditions. Our strategy for portfolios is to focus on partnerships that are more financially stable and have financially strong sponsors to help the partnerships navigate the volatile energy market.