Money flowed into the oil and gas pipeline industry's largest exchange-traded fund in December 2018 even as slumping crude oil prices sent midstream shares into a tailspin.
The Alerian Master Limited Partnership ETF, which tracks the Alerian MLP Index, garnered $287.3 million in net inflows during the month after a net $105 million flowed out in November 2018. The Alerian index itself dropped 9.4% in December 2018 on a total-return basis, which includes distribution income, after losing 0.8% in November 2018.
MLPs, which house billions of dollars of U.S. oil and gas pipeline assets, are not taxed at the corporate level and pay relatively high quarterly distributions to stockholders. Even though pipeline partnerships generate income primarily through take-or-pay contracts that guarantee long-term revenue streams regardless of how oil and gas prices move, a lower commodity price environment can hurt investor sentiment and hamstring equity valuations.
As the price of West Texas Intermediate crude plummeted throughout the fourth quarter of 2018, all but one of the top 10 North American midstream companies experienced double-digit percentage decreases in their stock prices. In December 2018 alone, West Texas Intermediate crude lost 10.8% to settle at $45.41 per barrel Dec. 31.
"While some traders may be relishing the volatility, we see it as a negative for the equities overall as it is, in our opinion a negative for investor confidence in the group," midstream analysts at MUFG Securities Americas Inc. wrote in a Jan. 2 note to clients. "In fact, we see the commodity price volatility as distracting investors from the improving underlying fundamentals of the midstream group overall."
Still, the shift away from the MLP structure in 2018 — in which several pipeline companies merged with their general partners, combined with their parent corporations or became corporations themselves — could help the industry ride out any 2019 commodity price volatility.
"The midstream sector ... is better positioned to withstand headwinds given simplified structures, limited external equity needs, better balance sheets and higher coverage ratios," midstream analysts at Stifel Nicolaus & Co. wrote in a recent note to clients.
A dozen broader energy ETFs tracked by S&P Global Market Intelligence saw $76.2 million in combined net inflows in December 2018.