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MLP Weekly: Pondering the Alternatives

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Another mixed back of performance for unitholders this past week as the benchmark index fell 0.6% despite crude oil marching higher towards $60.  It has been a frustrating period for units holders, including us here at MLPData, who are left pondering three different scenarios for why most Master Limited Partnerships are under-performing just about every other assets class (MLPs are outperforming Mall REITs!), in spite of rising volumes, higher crude prices and selective elimination of Incentive Distribution Rights.  

 

 

LP Performance

 

 

There may be more than three concerns across the investor base, but we have chosen to focus on those with metrics which over time will help explain the under-performance for the majority of midstream units, and perhaps give some direction to the future of unit prices.  

 

 

1.  MLPS are being repriced due to lower future growth, re-contracting risk, and underutilized infrastructure outside the Permian - Certainly, the outlook for organic growth has been lowered as the midstream industry has added significant capacity in advance of future volumes.  However, the lack of growth does not compensate for the yield increase of  high coverage units.  Fees are being re-contracted at lower rates in certain basins, as evidenced by recent disclosures from Boardwalk Partners, which at some point may be material for diversified midstream assets, but this will play out over the next 24-36 months, leaving much uncertainty to the outcome. Forecasts of  Shale Production for 2018 are ranging between  300,00 and 1,700,000 average BPD  of incremental production.  While much of the new production is  expected to be exported, the increase in volumes should stabilize cash flows for midstream even outside the Permian. 

 

EIA Production

 

 As of the most recent 3rd quarter, 9 midstream units have increased both Cash Flow and Distributable Cash Flow per unit rates on a year over year basis.  Of the eight, only two have generated a positive total return in 2017, MPLX LP and Noble Midstream Partners.  The ongoing concern is even with the higher volumes of the past 12 months, most per unit metrics have still been flat at best, with the uncertainty that funded projects will not offset the decrease from existing assets.  

 

 

2. Lousy performance in light of positive fundamentals has motivated post 2013 buyers and fund owners to liquidate. - As of late, this justification is gaining credibility as mutual funds have been leaking assets the last two weeks and approaching $500MM of withdrawals over the last 30 days.  Fund marketers are having a hard time convincing both existing and new investors that the upside is greater than the risks, which may lead to higher liquidations by year end as advisor's ponder how best to explain double digit losses to their clients.  Top holdings across the largest MLP funds can be found here

 

 

MLP Fund Flows

 

 

3.  HNWI are losing interest and confidence in the MLP income and total return model, reducing directly and indirectly demand for current and future unit issuance - Last May we noted that in 2009, 11.1MM K-1's were issued compared to only 9MM  in 2016.  In 2015, individual investors comprised 33% of the K1's issued, but only 27% in 2016.  Institutions, including banks and asset managers, have increased their K1 issuance by 5% over the same period, driven in part by swaps issued by banks to enable foreign exposure to MLP's.  The uncertainty related to a change in the tax may also be keeping some investors on the sidelines. We will need to wait a few months to know whether this trend has accelerated, validating the notion that HNWI are abandoning MLP vehicles, an ominous sign for unit prices.  

 

 

 

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