Got a little money burning a hole in your pocket? Yorkville Capital Management LLC says MLPs are the best energy investment while commodity prices are volatile.

Odds are in many MLPs’ favor because, frankly, their success isn’t necessarily contingent on current oil prices. For example, massive pipeline projects are typically under long-term, take-orpay contracts, which mean the midstream company gets paid regardless of current volumes.

Dismal commodity prices certainly didn’t make outgoing Kinder Morgan Inc. CEO Richard Kinder shy away from an opportunity to spend $3 billion on a prime Bakken pipeline that Harold Hamm’s privately-held Hiland Partners LP was looking to unload.

In a recent webinar with investors, Yorkville’s Darren Schuringa, founder and managing director of the investment group, ticked off more than half-a-dozen reasons why the low crude oil environment positions MLPs as a choice investment.

No. 1: MLPs had stronger performance than common energy equities in 2014.

“The conventional energy business model is output multiplied by the commodity price equals revenue. As a result, if commodity prices contract and output remains stable, your revenues will decline. That is not the MLP business model,” he said.

Based on Yorkville’s index, which contains all MLPs, the asset class produced yields up 7% for the past year. That’s compared to the typical energy business model, which was down 8%; oil service companies were down 24%; and E&P companies were down 29%.

“The benefit of the leasing model is MLPs generally produce less volatile performance than other energy-related investments,” Schuringa said.

No. 2: Fundamentally, the cash earned on investments isn’t tied to commodity prices in MLPs.

Schuringa noted that it’s too early to make absolute declarations on 2014, but based on the historical performance of MLPs during “the great recession” of 2008, more than 80% of MLPs maintained or actually increased their distributions.

“The asset class showed resiliency against two headwinds: commodity prices and a global recession,” he said.

No. 3: MLPs have historically posted strong returns after major pullbacks in oil.

Looking at the 10 steepest declines of oil prices since 2000, the average drop from peak to trough for crude was 37.6%. MLPs declined at average of 5.1%. Within a year, MLPs were positing average returns of more than 20%, he said.

“[MLPs] are a less volatile way to play the shale revolution in the U.S.,” he said, adding that within 30 days of hitting the trough, MLPs recouped their losses.

No. 4: Enhanced portfolio diversification. “It’s not only high income, but it’s stable income like bonds, and the growth is an equity characteristic that doesn’t exist in other fixed income investment alternatives,” Schuringa explained.

What’s more, MLP investors are reducing portfolio risk by adding MLPs, increasing income and enhancing returns. MLPs are an alternative asset class that is not equities, that is not commodities, not fixed income, and that’s because it’s U.S. energy infrastructure and it is just different.

No. 5: A rebound in MLPs is not contingent upon a rebound in the price of oil.

In 2008, MLPs pulled back on investments by 40%, and then popped up 80% based on the cash they were able to distribute to investors.

“We had a yield rally,” he explained. “Investors recognized the quality of what MLPs were producing and ultimately corrected quite rapidly in 2009.”

No. 6: Buying on market dislocations has traditionally produced outsized returns. Buying on commodity price dips has been a good strategy for MLPs. Their fundamentals are not tied to commodity prices, and consequently, they’re not weakening.

No. 7: And finally, MLP valuations are attractive and present a good entry point based on historic, low interest rates on 10-year Treasuries. They are currently at less than 2%, but that could change should the Federal Reserve put an increase into action.

Deon Daugherty can be reached at ddaugherty@hartenergy.com or 713-260-1065.

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