What does this pressure mean for the sector?
I think it depends on how an investor is looking at MLPs. We tend to see two types of investors. We see the asset allocators who look at MLPs as an asset class, and when we talk to those clients, they tend to still like the MLP vehicle. If you see MLPs as an asset class, then the recent volatility shouldn’t bother you, because inherently MLPs are still are what they are: They still tend to have low correlations to equities; they tend to be yield-based instruments. Because of that, they tend to still be a different asset class that serves a specific purpose in their portfolio.
When we look at the other types of investors who might look at MLPs as a tactical opportunity, that’s when it runs the spectrum and you see bunch of different opinions. Some people are coming in and are very bullish on the MLP sector, they’re bullish on energy, they’re looking for different ways to play it; they’re buying for a pure tactical allocation. We tend to be more on the asset allocation side.
In the MLP space, there has been a lot of merger and acquisition activity. What does this say to you?
That’s definitely a good signal. At the end of the day, it tends to be a smaller industry than the whole market. It’s a subindustry; it’s a pocket of the market. And the people buying and selling MLPs are in that subindustry. They’re the insiders, they know the market, they have the most information. So if you see more M&A in the space, that’s an indication they’re bullish on the space.
When advisors talk to you about the space, what are they asking?
It really depends on their time frame. When advisors are calling and asking about the MLP space, they tend to be looking more short term; when they’re calling and asking more generally about the fund and a little less concerned, they tend to take a more medium- and long-term view. Some are nervous about the recent pullback, but the asset allocators are looking more for long-term opportunity.
We’re seeing some oil rig counts falling, the growth in fracking is slowing down. If we see oil prices fall and if we see the volume of oil produced falling, how does that impact midstream producers?
It can vary by MLP. Some of the drillers, the oil producers, sign very-long-term contracts with MLPs, so they locked in a specific price to transport the commodity from point A to point B. In some instances, they’ve pre-leased space in that pipeline or in that storage facility. So in those instances, it doesn’t matter how much they’re producing for the MLP. For others, it can be more variable. So if we see more drillers coming offline, less oil coming off, that can slow down the growth of the MLP space, but again, MLPs are designed to be insulated from the price movement.