The master limited partnership asset class, as reflected by the Alerian MLP Index, has dramatically outperformed its peers on a "traveling" twelve month basis: 25 percent versus the S&P 500 13.4 percent, Dow Jones Utilities Index 9 percent and Morgan Stanley's REIT Index 16.6 percent, Darren Horowitz, managing director Energy Equity Research at Raymond James, told CNBC on Friday.
"If you were to rewind the clock and look back really over the past decade plus, the rate of change on a compound basis and the average distibution growth rate across the Alerian Index has outpaced the rate of change of inflation, as measured by the CPI [consumer price index], by almost three times—that's what investors are focused on," Horowitz explained.
In addition, he went on to say that investors are also focused on the composition of the balance sheet. "If you look at the partnerships today they've got a greater composition of fixed relative to floating rate debt, and average costs of capital are low."
The best positioned names to look at that have the fastest rate of distribution growth over the next three- to- five years are Williams Partners LP and Enterprise Products Partners, he said.
- Williams Partners LP has a "partnership that has a very geographically diverse asset base, excellent vertical intregration across the supply chain, a good balance sheet and also prudence in capital allocation. We expect distribution growth ... to grow about 6 percent year-over-year for the next couple of years."
- Enterprise Products Partners has one of the most graphically diverse asset footprint. "The key to that story is really a lower cost of capital on a relative basis versus other investment grade partnerships. This is a partnership that does not have a general partner so their overall cost of capital is two to three hundred basis-points lower than their peers—could also generate between 5 and 6 percent year over year distribution growth."
"This is an asset class where you have excellent transparency and future growth. You're seeing more and more capital invested at high rates of return," he concluded.
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