It’s been over a year since we checked in with our friends at Alerian, but a lot has changed since that December 2013 article. To review, Alerian was formed in 2004 to provide intelligence on master limited partnerships (MLPs) and the energy infrastructure markets. The company has several benchmarks that are used to assess relative performance of the sector, as well as to generate investment ideas.

The Alerian MLP Index (AMZ) consists primarily of large and mid-cap energy MLPs. The AMZ is a composite of the 50 most prominent energy MLPs, capturing about 75% of the sector’s market capitalization. The index includes MLPs involved in gathering and processing; natural gas transportation; petroleum transportation; exploration and production; coal; compression services; propane; shipping and refining.

There have been some significant changes in the AMZ since our previous report. Enterprise Products Partners (NYSE: EPD) continues to be the largest component of the index, but the second largest constituent — Kinder Morgan Energy Partners — merged with its corporate parent Kinder Morgan (NYSE: KMI) and is no longer a part of the index. This has boosted EPD’s weighting in the index from 15.5% in December 2013 to 17.1% today. Running a distant second is Energy Transfer Partners (NYSE: ETP), which now accounts for 8% of the Alerian MLP Index.

Dropping out of the top 10 since our previous report were the aforementioned KMP and Oneok Partners (NYSE: OKS). Replacing them in the top 10 were Regency Energy Partners (NYSE: RGP) and Targa Resources Partners (NYSE: NGLS). RGP is also the highest yielding member of the top 10 with an 8.8% annualized yield (based on the most recent quarterly distribution). The MLP portfolio reflected in the index has an annualized yield of 6%.

Note that RGP will only be sticking around until its pending merger with ETP goes through, at which point the gap between the EPD and ETP weightings should shrink a bit.

The AMZ has performed particularly well over the past six years, but has yet to recover from the losses suffered during the oil price correction late last year. After hitting an all-time high in September, the index has since retreated about 20%:

Alerian MLP Index Performance

Source: Alerian

Like the AMZ, the Alerian MLP Infrastructure Index (AMZI) has Enterprise Products Partners as the largest constituent. The AMZI is comprised of 25 energy infrastructure MLPs that earn most of their cash flow from the transportation, storage, and processing of energy commodities. The AMZI is a subset of the AMZ, as each of its 25 components is also included in the AMZ.

The AMZI has a smaller market cap at $294 billion (versus $363 billion for the AMZ), but has performed slightly better over the past three years, and held up better during last year’s correction (primarily because unlike the AMZ, it has no direct exposure to oil producers). The indicative yield for AMZI is currently 5.7%.

The Alerian Natural Gas MLP Index (ANGI) is an equal-weighted composite of 20 natural gas infrastructure MLPs that earn most of their cash flow from the transportation, storage, and processing of natural gas and natural gas liquids (NGLs). The 10 largest constituents of this index have less overlap with the AMZ or AMZI, with Williams Partners (NYSE: WPZ) at the top of the ANGI.

ANGI has a smaller market cap ($224 billion) and a higher yield than the AMZ or AMZI at 6.2%, with top 10 constituents Crestwood Midstream Partners (NYSE: CMLP) and Exterran Partners (NASDAQ: EXLP) yielding 11.4% and 9.1% respectively.

One other index of note is the Alerian Energy Infrastructure Index (AMEI), which is a composite of 30 core North American energy infrastructure companies engaged in the transportation, storage, and processing of energy commodities. Unlike the other Alerian indices, AMEI includes Canadian infrastructure companies and Canadian affiliates of U.S. MLPs. Index constituents are equally weighted within each category.

Alerian Energy Infrastructure Index Allocations

Source: Alerian

The market cap of businesses represented in AMEI is $531 billion, by far the largest of any of the Alerian indices. The indicative index yield has risen slightly since our previous report from 3.9% to 4.1%. The lower yield of this index relative to the others is primarily a function of the inclusion of the Canadian companies. These do not benefit from the same tax treatment as U.S. MLPs and consequently have lower yields on average.

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Portfolio Update

Sunoco Logistics Offering Spooks Buyers       

It’s one thing for MLPs to raise their distributions despite low energy prices — it’s easy to believe those are a temporary blip when one is getting paid more than a year ago. But now that the earnings season is over and the inevitable equity offerings are at hand, the market is suddenly not so sure.

Investors did not react well Wednesday to a secondary offering by Sunoco Logistics (NYSE: SXL) of 13.5 million units representing 6.3% dilution of limited partner interests. The offering priced overnight at a 3.2% discount to Tuesday’s close and quickly lost buyers money as the unit price sank 7% in Wednesday’s action.

The television entertainer Jim Cramer was quick to seize on “the deal not working right now” as a sign that “the market may be finally full up with these master limited partnership oil deals.”

The partnership did not specify a particular use for proceeds from the offering, but it has budgeted an ambitious $2 billion in expansion capital spending this year on crude pipelines linking to its big Gulf Coast terminal at Nederland, Texas and on natural gas liquids transport out of the Marcellus, including to its terminal south of Philadelphia, where SXL is planning a petrochemical plant.

Those projects are expected to continue the multi-year streak of 20%+ annual distribution growth, accomplished last year even as SXL produced nearly 50% more cash flow than its payouts consumed.

That pace of growth and financial security will likely matter much more in the long run than the wide spread for this week’s offering. We’re certainly not shying away from our recommendation to continue buying SXL below $55.

In other fundraising news for our portfolio recommendations, EQT Midstream (NYSE: EQM) sold 8.25 million common units at a 5.5% discount to Tuesday’s close, raising $627 million toward the $1.05 billion purchase price of a West Virginia gathering system it’s just agreed to buy from sponsor EQT (NYSE: EQT).

That offering, representing 14% dilution of common and subordinated units, fared better than SXL’s, with EQM’s unit price down only 5.2% Wednesday. We continue to view such dropdowns as benefiting mostly the seller and the sponsor in the long run, the main reason EQM remains a Hold.  

After Wednesday’s closing bell, Targa Resources (NYSE: TRGP) announced a 3.25 million share offering representing 7.7% dilution. It’s price is likely to tumble as well. But, as with SXL, the discount is unlikely to prove permanent. Buy #6 Best Buy TRGP below $135.

There will come a time when midstream offerings are viewed once more as an opportunity rather than a hazard.       

— Igor Greenwald