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Leading midstream energy fund saw outflows in January as MLP model scrutinized

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Leading midstream energy fund saw outflows in January as MLP model scrutinized

Funds in January flowed out of an exchange-traded fund based on the key midstream industry index as industry experts continued to question both the master limited partnership structure and the value of MLP-focused investment tools.

The Alerian MLP ETF, which is based on the Alerian Master Limited Partnership Index, saw nearly $22 million in net outflows in January after net inflows of $534 million in December 2017. The Alerian index gained 5.8% on a total-return basis, including reinvested distributions for the month, up from a 4.7% return in December, but shareholders have been showing an increasing preference for more simplified and liquid entities, which has pressured some MLPs to either convert to corporations or eliminate general partners' incentive distribution rights.

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"The compression of the MLP universe is unlikely to reverse: further corporate conversions and consolidations are probably more likely than an MLP IPO renaissance," CBRE Clarion Securities equity analyst Hinds Howard wrote in a Jan. 27 blog post.

Even Maria Halmo, director of research at Alerian, recently acknowledged that MLP IPOs could slow down because the new corporate tax rate reduction to 21% from 35% narrows partnerships' tax-advantaged status.

"It's not as good as it used to be to be an MLP," she said during an industry conference in Pittsburgh. "New IPOs, maybe we'll see fewer of them come public as an MLP, maybe they'll stick to the C corporation structure because you get a broader investor base, you're able to be part of the S&P 500 and … partnerships are not permitted to be part of the [S&P 500]."

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Net flows to the dozen broader energy ETFs tracked by S&P Global Market Intelligence, meanwhile, increased from $700 million in December to $938 million in January alongside an uptick in the price of West Texas Intermediate crude oil. After closing 2017 at $60.42 per barrel, the price rose 7% to settle at $64.73 on Jan. 31.

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