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Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: 2015 MLP Outlook, Highlights of Key Midstream Themes
January 26, 2015

In conjunction with our forthcoming 2015 MLP Outlook report, this Stat centers on the key 2015 midstream themes. Amidst a rapidly changing 4Q14 commodity price environment, the Alerian MLP index (AMZ - the benchmark index for master limited partnerships) posted a weaker-than-expected return in 2014. Specifically, the AMZ fell ~1% on an absolute basis; however, including an average yield of ~5.6%, the annual total return is closer to 5%. This total return of ~5% in the AMZ dramatically outpaced the carnage within other energy subsectors, with E&Ps and Oilservice equities down 30% and 25%, respectively. However, the AMZ underperformed the broader market (S&P 500 up ~11%) and, in particular, lagged the more comparable REIT/utility spaces (both of which were up 20+%). Clearly, the plunge in oil prices weighed on the MLP asset class, particularly during 4Q14; however, as we look ahead, we believe that MLPs continue to benefit from a number of structural tailwinds, some of which may not be accurately reflected in current valuation metrics. Specifically, 1) commodity price sensitivity and its impact on cash flows/stocks - yes, it does pay to have a lower-risk/fee-based contract structure in a challenging commodity price environment and not all contract structures are created equal; 2) cost of capital and the associated tailwind of continued low rates, coupled with prudence in capital allocation (the intrinsic value of retained cash vs. robust near-term distribution growth); and 3) the status of current valuations - MLPs appear attractive on a multi-year, total-return basis relative to alternatives in today's market (adjusted for risk), but we would still emphasize selectivity as opposed to a "buy the group" approach. Moreover, with the perpetuation of a rising U.S. dollar (which we believe may be one of the largest variables challenging our forecast for a 2H15 crude oil/energy equity price recovery), we emphasize playing defense.

This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.

There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. The Oil Services Index (OSX) comprises 15 of the largest oil service companies. The S&P SuperComposite Oil and Gas Exploration & Production Index (S&P Oil and Gas E&P) consists of all oil and gas exploration and production stocks included in the S&P SuperComposite 1500 Index. Investors cannot invest directly in an index. Additional information is available upon request.

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