The MLP-Treasury Yield Spread Widens
MLP-Treasury yield spread
The yield spread between the Alerian MLP Index (^AMZ) and the ten-year Treasury has widened due to the recent correction. AMZ was trading at a yield spread of 5.1% to the ten-year Treasury yield by the end of last week—higher than five-year and one-year average of 4.5% and 5.0%, respectively. However, the current spread is still lower than the five-year highs of 10.4%, which happened during the beginning of 2016. The lower spread, despite the massive correction, is due to the rise in bond yields. As a result, MLPs less attractive compared to US Treasuries.
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Out of the total 93 MLPs, 23 are trading close to their 52-week low with a difference of less than 5% between the current price and the 52-week low. These MLPs include Magellan Midstream Partners (MMP), EQT Midstream Partners (EQM), and Boardwalk Pipeline Partners (BWP).
The top MLPs by market capitalization, Enterprise Products Partners (EPD), Williams Partners (WPZ), MPLX (MPLX), and Energy Transfer Partners (ETP), are currently trading at a forward EV-to-EBITDA multiple of 12.9x, 11.6x, 6.6x, and 7.9x. They’re trading below their last average of 13.5x, 12.3x, 7.7x, and 10.3x, respectively.
MLPs’ current valuation
The wider spread shows that MLPs are trading at a discount to the historical valuation. As a result, there might be a buying opportunity considering the reduced counterparty exposure, improvement in the balance sheet position, higher crude oil prices, and a strong increase in drilling activity, which indirectly drive midstream MLPs’ throughput volumes. According to Baker Hughes, the total US rig count jumped to 975 as of February 9, 2018—compared to 946 the previous week, which represents a week-over-week gain of 29. The rig count is 234 more than the total US rig count during the same period last year.
The rise in US bond yields, weak drilling activity in a few of the shale regions, and a downward trend in crude oil prices are some of the concerns.
Next, we’ll discuss MLP rating updates during last week.