As Oil Slumps and Natural Gas Rises, Are MLPs a Bargain or a Trap?

At a time when investor appetite for stocks is understandably weak, many traders are taking on a more defensive stance by moving into safer stocks and sectors or by trying to pad returns with some yield.

For Darren Schuringa, co-founder of Yorkville Capital Management, the latter is true, especially since he specializes in one thing: Master Limited Partnerships (MLPs). His firm recently launched an ETF, the Yorkville High Income Fund (YMLP), which offers about an 8.7% yield, growing distributions, and enviable long-term growth.
"If you look at our 10-year track record, we've delivered 10% per annum of outperformance over the S&P 500," Schuringa says in the attached video clip. He points out that the average distribution (that's the MLP equivalent of a dividend) grew by 10% in the first quarter.
To be sure, 2012 has been a rough year for commodities and MLPs, and with the exception of natural gas, both have lagged the stock market. However, Schuringa explains, "there's very low correlation to the price of the underlying commodity—oil or natural gas—and the growth of the distributions," adding that as long as those payouts are steady or rising, the share prices will ultimately catch up.
"It's really just identifying those companies that do not cut distributions," he says.
As an asset class, the MLP and PTP (publicly traded partnerships) universe is currently valued at about $300 billion and has about 100 members, 80% of which are energy-related. As for the Yorkville High Income Fund specifically, Schuringa says it focuses exclusively on four types of commodity-based MLP's: oil and gas rigs; timber and fertilizer; propane; and marine transportation.
With the S&P 500 yielding about 2.2%, the paid-to-wait appeal of MLPs that pay north of 6% is obvious. This explains why Schuringa's fund has been among the most successful new ETFs of the year (in terms of trading volume).