Can a Trump Presidency Add Long Term Value to Midstream MLPs?

11/21/16 | Maria Halmo

One could argue, President-elect Trump has already added value to MLPs. For midstream names, specifically, the day after the election, the Alerian MLP Infrastructure Index (AMZI) rose 2.9%. Energy Transfer Partners (ETP), which is building the controversial Dakota Access Pipeline, rose 11.1%. As a result of major media attention, ETP is now a leading example for investors of how MLPs can benefit from reduced regulatory risk.

One focus of President-elect Trump’s political campaign has been “vital energy infrastructure projects.” Midstream MLPs play a critical role in building, maintaining, and operating these assets. Here’s how his proposed policies could impact the sector:

Reduced Regulations
Fewer and more lenient permitting regulations could get steel into the ground more quickly, as implied by Trump’s invitation to TransCanada (TRP) to reapply for a permit to build the Keystone XL pipeline. However, getting government out of the way of business leaves eminent domain conflicts unresolved. It is unclear whether an individual landowner would be able to force an MLP to reroute a pipeline, or whether the necessity of infrastructure outweighs the rights of the individual landowner.

Trump’s focus on regulations that benefit the American worker mean that safety and maintenance regulations would likely remain in place. If handled sensibly and correctly, regulations, like law and order, benefit everyone. By avoiding environmental disasters and keeping our workers safe, midstream MLPs can focus on the real, profitable business of processing, transporting, and storing our nation’s energy.

Opening Federal Lands
Trump has promised to lift restrictions on American energy reserves to create jobs. However, for US oil and gas companies, the limiting factor is not available reserves but the low cost of commodities. Many wells on known private land remain uneconomic. While coal MLPs have seen their unit prices rise, any measures taken that would improve the economics for oil and gas companies would only increase the competition for coal (and vice versa).

Revamped Tax Code
Taxing all partnerships at corporate levels would remove a significant MLP investment incentive. MLPs benefit from pass-through status and consequently, frequently pay higher yields than corporations. That said, the 2015 JCT tax expenditure study indicates that publicly traded partnerships engaged in energy-related activities are estimated to cost the government around $1.2 billion per year in foregone revenue, limiting the downside impact.

Lower corporate and individual tax rates, in the absence of changing partnership taxation mentioned above, could still change the make-up of the asset class. Again, as pass-through entities, MLPs would not directly benefit from a lowered federal corporate tax rate. Instead, those MLPs already looking at abandoning the structure in favor of becoming C corporations--a trend that began with the Kinder Morgan reincorporation in 2014--may be further encouraged to do so. For those MLPs that remain partnerships, a lower individual tax rate could reduce the value of the tax deferral associated with MLP distributions.

Trump’s First 100 Days are Still 64 Days Away
The investing community should continue to expect relevant news flow in the coming weeks. Trump has been invited to visit Canada by their Prime Minister Justin Trudeau, who has championed Canada’s carbon-tax plan, which Trump opposes. Additionally, Trump has also slowly begun announcing candidates for his senior-advisors and cabinet members. Regardless, his concern for the vital energy infrastructure in America is sure to touch the MLPs which own and operate those assets.