To be fair, all of this occurred during a decade of otherwise excellent performance. Holders through the ‘Naughts’ were well rewarded for their patience. Unfortunately, MLPs have never been tested by a sustained period of rising rates. Their performance in that scenario is uncertain.
Some pain is already evident. The last year hasn’t been particularly unkind and despite their track record, both Kinder Morgan Energy Partners LP (NYSE:KMP) and Enterprise Products Partners L.P. (NYSE:EPD) have recovered less well from the recession than their smaller and more nimble peers (see Figure 2). Sharp-eyed readers will have already noted that Kinder Morgan Partners’ spread hasn’t recovered to its 2% norm post-recession (see Figure 1). That’s worrisome as rates rise.
Strong growth makes for stronger returns.
The big equalizer as rates rise is growth. Rising distributions multiply returns in good times and counter share price erosion in bad times. Magellan Midstream Partners, L.P. (NYSE:MMP)’s compounded annual dividend growth was almost twice its peers’ pace post-recession. That growth drove total returns. Magellan returned 300 percent for holders, lapping the competition (see Inset, Figure 2).
Everyone put money to work during the Credit Crisis, taking advantage of cheap capital. Plains All American Pipeline, L.P. (NYSE:PAA) raised close to $2 billion in fresh capital. Magellan rounded up a little over $1 billion. Enterprise Products Partners L.P. (NYSE:EPD) swallowed TEPPCO and Duncan Energy, and Kinder Morgan put billions to work.
It’s not just the size of the meal, though. It’s the size of the dog. While Kinder Morgan put far more capital to work than comparatively tiny
Magellan, Magellan’s infusion was almost half its 2008 asset base . By contrast, the $3 billion raised by Kinder Morgan Partners was a drop in an $18 billion bucket. Coming off its smaller base, Magellan boosted capacity 50% from 2009 to 2012. Those timely investments are what drove Magellan’s segment leading growth, amplifying total returns.
Find growth to protect your capital.
MLPs have never faced a period of sustained rising interest rates. They simply haven’t existed long enough to see one. With rates as low as they’ve been, they’ll eventually face that headwind. These are uncharted waters, and the few short rate-rising storms they’ve encountered suggest that a big storm will not be without consequences. Look to the MLPs with strong growth potential to protect your hard-earned capital from rate-driven losses.
Record oil and natural gas production is revolutionizing the United States’ energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg.
The article Don’t Let Rising Rates Eat Your Lunch originally appeared on Fool.com and is written by Peter Horn.
Peter Horn has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P. and Magellan Midstream Partners, L.P..
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