Last year, I wrote an article about MLP investor fears for 2015; looking back over the year, every one of them has come to pass. Crude contagion continued and got worse as volumetric risk became very real. The Fed announced an interest rate increase, and MLPs are still accessing capital, albeit at higher cost. Keystone XL was vetoed (and, as predicted, no big deal). Finally, black swan events came to pass: previously sacrosanct distributions are now potential sources of growth capex, and OPEC effectively removed any limits on production delaying a balance in supply and demand. Still, this month saw a white swan event in the form of the lifting of the crude oil export ban.
The First Dominoes
We’ve previously written about Kinder Morgan (KMI) cutting its dividend and how MLPs may start to view cash differently. The much larger fear, beyond just what one company did, is that as a bellwether, KMI may herald the start of distribution cuts across energy infrastructure. Amid rampant speculation about who may be next or most at risk (and equally fervent insistence by some management teams that they will not cut distributions), some dominoes have started to fall.
The Teekay family of companies announced distribution cuts and unlike Kinder, they did not see stock prices trade up afterwards. Quite the opposite. MLPs Teekay LNG Partners (TGP) and Teekay Offshore Partners (TOO) each cut their payout 80%, and both traded down more than 50% that day. Parent Teekay Corporation (TK) cut its dividend 90% and fell 58.4%.
Management’s decision to cut the distribution at TGP was surprising because the company’s ships have longer-term contracts that provide stable cash flow in volatile macro environments like the current one. The company is also a K-1 issuer, which generally equates to higher retail ownership and attendant emphasis on protecting the income payout. The decision is less surprising at TOO, but the severity of the market’s initial reaction caught many off guard given that the same justification—this is a financing model problem, not an operating model problem—was used as KMI.
Teekay does not have bellwether status like KMI, but its distribution cuts have not gone unnoticed by MLP management teams. While Kinder’s strong performance after a cut may have encouraged them, the market’s response to Teekay is quite sobering. The Teekay domino may not have hit as many others on the way down.
Pink Sheet Blues
While it was predictable that given low commodity prices, Production + Mining companies would cut their distributions, it may not have been obvious how many would be well on their way to a national exchange delisting by yearend. Of all the Production + Mining companies, only the Alliance family—Alliance Resource Partners (ARLP) and its general partner Alliance Holdings GP (AHGP)—is still trading in the double digits.
Broadly speaking, there are two ways that a company may be delisted. First, the average closing price is below $1 over a consecutive 30-day period. Second, the average market cap drops below $50 million over a consecutive 30-day period. But there is some fine print with the second one: if a company is a REIT or a limited partnership, the market cap test falls to $35 million. For any company, if average market cap drops below $15 million, delisting procedures begin immediately. Otherwise, a company is warned and given a chance to repair the situation. Two MLPs, New Source Energy Partners (NSLP) and Rhino Resource Partners (RHNO), already trade on the pink sheets. NSLP hasn’t seen a $1 stock price since August 5th, and RHNO last closed above $1 on October 16th.
In that same vein, BreitBurn Energy Partners (BBEP) last traded above $1 on December 4th, Atlas Energy Group (ATLS) was last there on December 24th, and Atlas Resource Partners (ARP) ended the year at $1.03 but is below the threshold again in 2016.
The exchange on which a company trades may not be germane to their business practices, but liquidity matters in an uncertain market. A lack of liquidity can make price swings wider; owning small names on the pink sheets involves taking on substantial additional risk.
Outlook Not Good
When Moody’s changed their outlook on KMI from stable to negative, Kinder reacted immediately by cutting the dividend to free up cash flow and Moody’s responded by restoring Kinder’s outlook to stable.
However, the same week Moody’s restored KMI’s outlook, it revised the outlook of both Plains All American Pipeline (PAA) and EnLink Midstream Partners (ENLK) from stable to negative. In the case of PAA, increasing leverage and decreasing coverage is concerning the agency. In the case of ENLK, it was due to the high price it paid for Tall Oak, as well as attendant execution risk.
As we’ve written before, if an investor waits for a downgrade to sell a position, it may be too little, too late.
The crude oil export ban has been lifted at last, and we jokingly considered placing internal (non-monetary) bets about which MLP would be involved in the first shipment. Enterprise Products Partners (EPD) was the first off the block with an announcement that it would load 600,000 barrels of domestic light crude during the first week of January. However, the next week, NuStar Energy (NS) and ConocoPhillips (COP) announced that their light crude shipment would be leaving the very last day of 2015, and that they believed it was the first Lower 48 export in 40 years.
If the US begins to export crude oil, it could provide opportunities for energy infrastructure companies equivalent to those afforded by exporting LNG. While these companies will not directly export the crude, they will build, own, and operate the pipelines, terminals, storage facilities, and docks which bring the oil from the wellhead to the ship.