Daily Agenda: Yemen Conflict Rattles Oil Markets

Dubai exchange divests LSE stake; German consumer confidence rises as do U.K. retail sales; Europe private credit shows contraction.


Persian Gulf state military coalition began operations in Yemen, sparking a sharp rally in crude oil markets. Houthi militants, comprised primarily of Shia fighters supplied by Iran, were the target of air strikes as Saudi Arabia and its allies seek to prevent the government of Yemeni President Abd Rabbuh Mansur Hadi from being toppled. Iranian officials have denounced the bombings in official statements. In early morning electronic trading, front-month futures contracts for both Brent and West Texas Intermediate grades of oil rose by nearly 5 percent for the session, as this new sectarian conflict on the Arabian Peninsula redoubles fears over regional stability.

German consumer confidence. The mood of shoppers in Germany is improving significantly according to data released today by GfK. The research firm’s headline survey index registered at 10 for April, the highest reading since October 2001, with increased activity measures across various segments of the European Union’s largest economy.

Dubai exchange offloads LSE stake. Today Borse Dubai announced the sale of its entire 17.4 percent stake in the London Stock Exchange Group after nearly a decade of ownership. Based on the closing price for LSE shares in yesterday’s session, the total received in the transaction likely exceeded $2 billion.

U.K. retail sales beat forecasts. In another signal of increasing confidence among European consumers, February retail sales for the U.K. were released today with the headline index at 5.7 percent year-over-year, much higher than consensus forecasts. U.K. retail consumption data has been remarkably strong in recent months on the back of low fuel costs, which dropped more than 15 percent in the year ending February 2015.

Private credit slips in Europe. Private-sector lending data for February released today by the European Central Bank saw a marginal year-over-year contraction in outstanding private-sector credit for the 19-nation common currency region. Despite the bank’s liquidity measures, increased capital requirements for the region’s banks have weighed on lending, particularly in the small business segments and southern economies.

U.S. initial claims on deck today. At 291,000, last week’s U.S. initial jobless claims data was better than forecast but the four-week average rose marginally. If this week’s claims data remains range bound, as consensus forecasts suggest, it may indicate that the overall trajectory of labor improvement is moderating.

Portfolio Perspective: MLPs Are UndervaluedLowell Miller, Miller/Howard Investments

Free-falling crude oil prices the past year have unduly punished master limited partnerships (MLPs), which transport, store and process oil at fixed fees. Their share prices plunged with the rest of the energy complex, even though their profits are not dependent on crude prices. MLPs aren’t selling the commodity and make money, as long as black gold flows through their pipelines. The market will eventually have to reward MLPs for their superior growth rates and dividend yields.

MLPs, as tracked by the largest exchange-traded fund in their category, Alerian MLP ETF, dropped 4 percent year-to-date while adding 0.8 percent in the trailing year. It’s severely lagged the SPDR S&P 500 ETF of 2 percent and 15 percent, respectively, over the same periods.

AMLP is trading at a steep discount despite sporting higher earnings and yielding a fatter dividend than the benchmark S&P 500. AMLP currently trades at only 0.84 times sales versus 1.7 times for S&P, according to Chicago–based financial data company Morningstar. Yet MLPs in the ETF have a historical earnings growth rate of 15 percent, eclipsing the S&P’s historical earnings growth of 6 percent. AMLP’s historical sales growth rate of 8 percent doubles the S&P’s 4 percent sales growth rate. In addition, the ETF is yielding nearly 6 percent or almost triple that of the benchmark.

Low valuations has spurred mergers and acquisitions across the entire energy sector. Large firms naturally want to take advantage of smaller firms that are struggling to survive. Dealogic counts 29 M&A deals worth $13.2 billion among oil and gas companies as of mid-March — the highest levels year-to-date on record. MLPs had 12 M&A transactions valued at $5.4 billion as of mid-March. That 48 percent more volume compared to the same period last year and the second highest on record. M&A activity is expected to continue, which will support MLP share prices.

Lowell Miller is the founder and director of research at Miller/Howard Investments, an SEC-registered investment firm in Woodstock, New York.