Master Limited Partnerships (MLPs) have had investors flock towards them as they pay large dividends and offer tax advantages, but now they are in trouble. Pipeline and processing plant companies that are typical for this kind of partnership were long considered to be immune to market upheaval. This is no longer the case as the Alerian MLP index is underperforming other yield-oriented indexes while at the same time hitting a five-year low and being down 30% since the beginning of the year.
MLPs make money based on traffic volumes. Historically this has been considered a safe haven from price crashes as volumes never drop off as much as prices. This thinking has now been challenged by a recent deal between Chesapeake Energy Corp and pipeline operator Williams Cos Inc. that creates lower fees with an increase in volume.
“The declining oil price has impacted MLPs just as much as the (exploration and production) sector,” Credit Suisse investment banker Brian McCabe was recently quoted as saying.
These partnerships are central to the U.S. shale oil industry. A decade ago there were 40 publicly traded such partnerships and these days there are 130, and it is a $735 billion market. Any trouble here affects Wall Street, U.S. shale oil fields and the energy companies that control these partnerships alike.
Partnerships that need access to public markets to finance new projects are running into trouble. Lower oil and gas prices are driving investors away and the Fed recently signaling a rate hike is compounding this problem. Following the slide in crude oil this past year investors now expect prices to stay low for years. Morningstar analysts expect prices to rebalance no earlier than 2017 and thus remain a drag on the sector for the foreseeable future. As a result, distributions are thought to keep growing slower, and a full recovery is not expected for years to come.