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MLPs Sink as Investors Dump Pipeline Stocks on Oil Meltdown

Nilanjan Choudhury

It's been a harrowing 14 months for energy sector investors with almost every corner of this important area being under the pump. One such sector hit unnecessarily hard by the current downturn is the publicly traded master limited partnerships group (MLPs), particularly those owning and operating energy infrastructure assets.

The Business of MLPs

MLPs differ from regular stocks in that interests in them are referred to as units and the unitholders (not shareholders) are partners in the business. Importantly, these hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities.

MLPs typically distribute nearly all of their cash flows back to unitholders. They are not required to pay a corporate income tax as the tax liability of the entity is passed on to its owners (or unitholders) in the form of a cash dividend (distribution). This allows the MLPs to offer very attractive yields to the investors.

Finally, the assets that these partnerships own – oil and natural gas pipelines and storage facilities – typically bring in stable fee-based revenues and have limited, if any, direct commodity-price exposure. This enables these MLPs to pay out fairly growing distributions.

Negative Sentiments Prevailing in the Sector

Considering the potential tax advantages, coupled with their safe and sustainable dividend payouts, MLPs should have been the ‘safe haven investment’ for energy investors during the ongoing oil rout. However, the year-long crude price crash has been steadily diminishing the attractiveness of the MLPs on the whole.

In fact, the pipeline companies had a rough few months on the stock markets, and things got worse during September. The Alerian MLP Index – comprising 50 midstream energy firms with 75% of available market capitalization – lost 15% last month, and longer-term have dived nearly 25% in the last 3 months.

Not only has the carnage eliminated years of gains associated with the shale revolution but also wiped out billions in market value from some of the country’s top energy companies.

When commodity prices started their downward journey in the middle of 2014, midstream operators – with relatively consistent and predictable cash flows under long-term contracts – were fairly unscathed. However, with more and more industry participants viewing the oil glut (responsible for the price plunge) as a long-term phenomenon as opposed to a passing trend, they are looking to get out of their investments fearing that the ongoing crisis will ultimately eat into the demand for new pipelines and processing plants.    

The Top Losers for September

The biggest MLP losers for September include Columbia Pipeline Partners L.P. CPPL, Shell Midstream Partners L.P. SHLX, Summit Midstream Partners L.P. SMLP, and Dominion Midstream Partners L.P. DM, which fell 41%, 36%, 33%, and 32%, respectively. Among major constituents, both Plains All American Pipeline L.P. PAA and MarkWest energy partners L.P. MWE lost 25%. 

Are These Stocks Being Overly Punished?

Granted, excess supply and weak demand for oil and natural gas impacts pipeline volumes by affecting growth plans, but the extent of the sell-off in the group is much greater than can be justified by fundamentals alone.

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MARKWEST EGY PT (MWE): Free Stock Analysis Report
 
PLAINS ALL AMER (PAA): Free Stock Analysis Report
 
DOMINION MIDSTR (DM): Free Stock Analysis Report
 
SUMMIT MIDSTRM (SMLP): Free Stock Analysis Report
 
SHELL MIDSTREAM (SHLX): Free Stock Analysis Report
 
COLUMBIA PIPELN (CPPL): Free Stock Analysis Report
 
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