🚰 MLPs & Midstream
Midstream companies own pipelines, storage, and processing plants. They make money by moving and storing hydrocarbons — fee-based businesses that profit from volume, not commodity prices.
Why midstream is different
| Business Model | Revenue Driver | Oil Sensitivity |
|---|---|---|
| E&P (XOP) | Sell at market | Very High |
| Services (OIH) | E&P capex | High |
| Midstream (AMLP) | Throughput volumes | Low-Moderate |
Think toll road: the operator profits from traffic volume, not car prices.
Fee-based contracts
| Feature | Benefit |
|---|---|
| Take-or-pay | Revenue floor if volumes drop |
| Minimum volume commitments | Demand protection |
| Inflation escalators | Fees rise with CPI |
| Long-term (10-20 years) | Revenue visibility |
The yield advantage
| Asset Class | Typical Yield (2025) |
|---|---|
| MLPs (AMLP) | 7.5-8.0% |
| REITs | 4.5% |
| Utilities | 4.0% |
| 10-Year Treasury | 4.5% |
MLPs offer 300+ basis point premium over alternatives.
ETFs compared
| ETF | Expense | Yield | Focus |
|---|---|---|---|
| AMLP | 0.85% | ~8.0% | Pure MLPs, highest yield |
| MLPA | 0.45% | ~7.7% | Lower cost |
| EMLP | 0.95% | ~4.1% | Includes utilities |
| TPYP | 0.40% | ~7.0% | Lowest cost |
Distribution coverage
The coverage ratio (DCR) measures sustainability:
| DCR | Risk Level |
|---|---|
| Above 1.5x | Low — room for growth |
| 1.2-1.5x | Moderate |
| 1.0-1.2x | Higher — cut risk |
| Below 1.0x | Cut likely |
Sector average (2025): 1.8-2.0x — very healthy.
Tax considerations
| Ownership | Tax Form | In IRAs |
|---|---|---|
| Direct MLP | K-1 (complicated) | UBTI issues if >$1K |
| MLP ETF | 1099 (simple) | No UBTI issues |
Bottom line: Use ETFs for simplicity, especially in retirement accounts.
Interest rate sensitivity
Conventional wisdom says MLPs move inversely with rates. Data says otherwise:
| Metric | Value |
|---|---|
| Correlation with AGG | 0.1 (very low) |
| R² with 10-year | Lower than REITs |
MLPs are “Fed-agnostic” — throughput and coverage matter more than rates.
The divergence signal
When AMLP rises while oil falls = positive divergence:
| Pattern | Signal |
|---|---|
| AMLP up, oil down | Fee-based model proving resilient |
| AMLP down more than oil | Volume concerns — investigate |
2025 example: Oil fell ~20%, MLPs rose ~10%.
When to favor midstream
| Condition | Favor? |
|---|---|
| Yield > 8% | Yes |
| Coverage > 1.5x | Yes |
| Oil weakness | Often yes (fee buffer) |
| Volume concerns | No |
Quick reference
| Situation | Best Choice |
|---|---|
| Maximum yield | AMLP |
| Lower cost | MLPA, TPYP |
| Tax-advantaged accounts | ETFs (no K-1) |
For AMLP divergence signals and income rotation, see Energy Market Signals.