The first quarter of 2013 has produced one of the best quarterly performances on record for the MLP sector. Two major components contributed to a double digit rally of approximately 20%( depending on the benchmark): a general search for yield and a catch up trade after the Q4 2012 tax related sell-off.

The search for yield should continue as spreads over alternative income products continue to be attractive; MLP are yielding about 5.5% versus 10 year US Treasuries at 1.9%, REITs at 3.5%, Utilities at 4.0% and BBBs at 3.3%.

The fundamental outlook also remains positive as $250 billion to $300 billion are still expected to be needed to manage an upgrade of our nation’s energy infrastructures in the next 10 years. 

On the valuation front, while spreads are still indicating relative value, price to distributable cash flow (a measure similar to the more traditional P/E ratio more appropriate for equities) is still above 11 times (11.6) and it remains above 1 standard deviation.  This metric makes the sector expensive and it is close to the same levels reached in 2005 in conjunction with that intermediate top.

Some of the highlights surfaced from a conference call with Cushing MLP:

-          Expectations for distribution growth at 5% to 7% may be too cautious

-          2013 should see 15-25 IPOs (a large number) as a result of interest in the space and a growing tendency of the major oil integrated companies to drop down assets into MLP structures due to their better valuations and easier/cheaper access to capital

-          Crude Oil-Long Haul Nat Gas performance spread should continue as MLPs involved in crude oil services seem to continue to have an edge. Personally, I think the spread may be getting stretched as since 2010 crude oil MLPs returned 105% while LH Natgas only 32%. Things may be closer to a turning point and a reversal of performance.