The holiday spending frenzy is well underway as some of the biggest shopping days of the year, including Black Friday…
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
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