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Why Nontraditional Master Limited Partnerships Have Outperformed in 2018

By Peter Staas on Mar. 3, 2018

After a powerful rally that started in December 2017 and lasted through late January, the Alerian MLP Index has given up these gains and finds itself within spitting distance of last year’s lows, despite resilient oil prices and surging US hydrocarbon output.

Some commentators attribute the selloff to rising interest rates, a trend that erodes the future value of distributions (particularly those that remain flat). Higher interest rates would also pose challenges for heavily leveraged names that run tight distribution coverage and face a murderer’s row of debt maturities in coming years.

Many MLPs have taken their medicine and slashed their distributions to shore up their balance sheets, pay down debt and fund more of their capital expenditures internally; however, some prominent publicly traded partnerships have only taken half-steps toward sustainability and continue to issue equity at yields that, frankly, only someone planning to cut the distribution could love.

Governance issues and misaligned incentives also remain a cause for concern, a point underscored by the market’s focus on the challenges that burdensome incentive distribution rights (IDR) can create as an MLP matures. In an environment where an influx of private-equity money has intensified completion for new projects, this lodestone becomes an even bigger impediment.

And although ONEOK’s (NYSE: OKE) roll-up of ONEOK Midstream Partners LP last year worked out well for investors in both entities, unitholders all too often end up feeling the most pain, particularly in distressed situations. Recall the inflated multiple that Plains All-American Pipeline LP (NYSE: PAA) paid to eliminate its IDRs before announcing a second payout cut.

Tax complications and the uncertainty surrounding future simplification transactions, coupled with concerns about contract expirations and governance issues, may keep generalist funds and badly burned retail investors on the sidelines.

Meanwhile, the universe of primarily MLP- and energy-focused funds that help to provide liquidity for the group continue to contend with weak flows, if not outflows, and redemptions, creating a lack of depth in the market. Check out this graph tracking net flows for the mutual funds that focus on the MLP asset class.

(Click graph to enlarge.)
MLP Mutual Fund Flows

The Alerian MLP Index ETF (NYSE: AMLP), an exchange-traded fund with a market capitalization of $9.14 billion that tracks a popular basket of 40 prominent MLPs, has likewise suffered steep outflows since the start of February.

(Click graph to enlarge.)
AMLP Flows

Against this backdrop, high-quality MLPs have struggled to gain traction. Enterprise Products Partners LP (NYSE: EPD), for example, delivered a blow-out fourth quarter and continued to add to its backlog of growth projects on the Gulf Coast. Management reiterated that the blue-chip MLP aims to self-fund the equity portion of its growth capital expenditures next year, and we see more upside to cash flow as new Gulf Coast petrochemical capacity ramps up in 2018.

Despite these impressive results and encouraging guidance, Enterprise Products Partners’ unit price barely budged. Given the lack of depth in the market, Enterprise Products Partners’ heavy weighting in the Alerian MLP Index and the fact that most MLP investors already have exposure to the name, this blue-chip stock effectively tracks the benchmark.

 

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