Gauging The Impact Of Rising Interest Rates For MLPs

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Includes: AMJ, AMJL, AMLP, AMU, AMUB, AMZA, ATMP, CBA, CEM, CEN, CTR, DSE, EMLP, EMO, ENFR, FEI, FEN, FMO, FPL, GER, GMZ, ILPRX, IMLP, JMF, JMLP, KMF, KYE, KYN, MIE, MLPA, MLPB, MLPI, MLPN, MLPO, MLPQ, MLPS, MLPX, MLPZ, NML, NTG, SMM, SRF, SRV, TTP, TYG
by: Tortoise
Summary

MLP evaluation of the impact of rising rates from both a direct and indirect basis.

Why are rates moving higher?

Near term impact on MLPs not a cause for concern.

The impact of rising rates on energy investments is clearly relevant given the macro concerns blamed for last week’s abysmal market showings. As we assess Master Limited Partnerships (MLPS) we evaluate the impact of rising rates from both a direct and indirect basis.

From a direct standpoint, there is an impact to the extent that a company has floating rate leverage. The key mitigating factor is that midstream MLPs are approximately 80% fixed rate debt, so this impact is very minimal on cash flow. From an indirect standpoint, we look to assess the impact on the weighted average cost of capital and returns over and above that cost of capital.

While you could see some increases in the cost of debt and equity, there are several mitigating factors in our view that help lessen the impact of the higher rates and ultimately allow companies to continue growing their distributions.

A few of those mitigating factors are:

1) Excess coverage,

2) Internal versus external growth; and

3) The ability to pass through inflation via either higher rates or volumes

The next point simply looks at what history has shown us. Historically, when rates have increased by 50 basis points or more, the return of MLPs has actually been quite positive and similar to what you see in the S&P 500. In fact, MLPs have averaged a 6.8% return based on the 15 different time periods that we have noted since 2000. This compares favorably to the S&P 500 average return of 5.1% for the same time periods.

Finally, one of the key factors to assess is WHY are rates moving higher?

In this case, it seems fair to say that indications point to a strong economy, driving lower unemployment, leading to rising wage pressure.

Assuming all of that is correct, we would fully expect it leads to higher consumption of energy, not lower. Higher consumption of energy means more molecules flowing through the pipelines and more revenue for pipeline companies.

In summary, while you may see some near term impact on MLPs from rate moves, we feel the data points to a more positive story and history has shown that to be the case as well.

Disclaimer: Nothing contained in this communication constitutes tax, legal, or investment advice. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. This article contains certain statements that may include “forward-looking statements.” All statements, other than statements of historical fact, included herein are “forward-looking statements.” Although Tortoise believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Actual events could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. You should not place undue reliance on these forward-looking statements. This podcast reflects our views and opinions as of the date herein, which are subject to change at any time based on market and other conditions. We disclaim any responsibility to update these views. These views should not be relied on as investment advice or an indication of trading intention.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.