Are MLP Valuations Too Rich?

July 23, 2014

This week’s Chart of the Week takes a look at Master Limited Partnerships (“MLPs”) and their current valuations based on their EBITDA Multiple (calculated by Enterprise Value divided by the 12-month EBITDA). Generally, a higher multiple implies a more expensive valuation. Relative to long-term averages and the S&P 500, MLPs appear expensive today. The elevated valuations, however, are pricing in higher expected rates of growth. These higher growth expectations do not come as a surprise given the recent increase in domestic energy production and expected midstream infrastructure expenditures, which could approach $640 billion between now and 2035.¹  Compared to the prior study done in 2011 ($261B), the 2014 estimates represent a 145% increase in infrastructure spending.

Paying a premium for MLPs relative to historical averages may not necessarily be a bad thing assuming that the estimated growth within the energy infrastructure sector comes to fruition. If, however, there is a catalyst in the market such as a rapid increase in interest rates, regulatory change, or an international crisis, MLPs may experience a correction.

¹ Interstate Natural Gas Association of America