Since our initial stress test of the Alerian MLP Infrastructure Index’s (AMZI) yield (read more), the index underwent its quarterly rebalancing with related constituent changes, and a few MLPs announced distribution cuts. In terms of constituent changes, Holly Energy Partners (HEP) and CNX Midstream (CNXM) were added to the index, while Tallgrass Energy (TGE) was removed. The chart below incorporates recently announced 50% distribution cuts from DCP Midstream (DCP) and EnLink Midstream (ENLC) and the 73% cut from Noble Midstream Partners (NBLX). The scenario analyses assume distribution cuts of 50% and 75% for AMZI constituents, except those that have already announced cuts. Note that, again, these scenarios do not reflect Alerian’s base case assumptions and are purely illustrative. In both scenarios, MLP yields still represent healthy premiums to other income-focused sectors. Even when assuming a 75% index-wide distribution cut, the AMZI’s yield of 6.5% is 160 basis points above that of REITs and 240 basis points above that of utilities. To be clear, across the board cuts are not anticipated. Enterprise Products Partners’ (EPD) decision to proactively announce its 1Q20 payout at the same level as its 4Q19 distribution and Magellan Midstream Partners (MMP) indicating no change to its 3% distribution growth forecast for 2020 in today’s presentation help ease concerns around the durability of distributions from larger MLPs in the current environment.
Management teams have taken advantage of these historically high yields by continuing to use this downturn as a buying opportunity. The table below reflects direct insider purchases of midstream securities since March 18 when our last note on the subject was published (see here). In the last six trading days alone, there have been over $4 million of insider transactions among constituents of the Alerian Midstream Energy Index (AMNA), including significant purchases at ONEOK (OKE), Plains GP Holdings (PAGP), and NuStar Energy (NS). Since February 14, 29 out of 49 total index constituents have seen insider purchases, reflecting management teams’ broad confidence in their underlying businesses.