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 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 three 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.
