The End of an MLP Era

It’s been ugly for MLPs over the last 12 months, with the Alerian MLP Index (AMZ) off 29.3% since reaching an all-time high on August 29, 2014. Proponents have tried to assuage investor fears by sticking to the script: MLPs operate toll road business models that are agnostic to commodity prices and generate stable and growing cash flows. MLP unit prices are uncorrelated with interest rate movements. Long-term fundamentals remain intact as North America needs $641 billion of energy infrastructure investment over the next 20 years.

At this point, you either believe it or you don’t, and you’re voting with your investment dollars accordingly. Something may push your opinion in another direction, but I’m going to go out on a limb and say it’s more likely to be a change in the macro environment, e.g. stabilization in crude production or even lower for even longer, as opposed to another blog post, analyst report, whitepaper, or webcast saying things you’ve already heard. So rather than slay the slain, let’s talk about something else: Ferrellgas Partners (FGP) ending its 20-year streak of $0.50 quarterly distributions.

For long-time MLP observers, it was hard to believe that FGP’s diversification initiative announced back in January 2014 would amount to anything. Though FGP had grown in size since its June 1994 IPO, it had never raised its distribution. Not once. Including its first quarterly distribution announced on November 18, 1994, FGP had rattled off 77 consecutive quarterly distributions of $0.50. (As a quick aside, yes, FGP has IDRs. I went back to the company’s IPO prospectus to double check for this post because it has never come up in 12 years of conversation. The splits are traditional at 13%, 23%, and 48%, and go into effect at $0.55, $0.63, and $0.82, respectively.)

Because the company’s quarterly distribution announcements were as automatic as Steph Curry, FGP became the no-growth MLP benchmark. For companies that were increasing their distributions, FGP represented the stick, i.e. this is where you’ll trade if you stop growing. And if a company’s yield was higher, FGP represented the carrot, i.e. this is where you’ll trade if the market stops thinking that your distribution is at risk. Rightly or wrongly, a small-cap retail marketer of propane came to be an important measuring stick for midstream and non-midstream companies alike. And though we have long discouraged investors against using MLPs as fixed-income substitutes in their portfolios, if you had to choose one for that purpose, FGP would be it.

Then the Bridger Logistics acquisition and board-approved 2.5% distribution increase to $0.5125 came along and messed everything up. But since the announcement didn’t have record and payable dates, and since it was contingent upon the transaction closing, I remained in denial. After all, only in Bizarro World would FGP raise its distribution. We imagine that the three companies that have been around to watch the entire streak—Buckeye Partners (BPL), Enbridge Energy Partners (EEP), and ONEOK Partners (OKS)—felt similarly.

The transaction closed on June 24th, and the company announced on August 20th that the new distribution would be payable on September 14th to unitholders of record on September 7th. It’s been a couple of days since unitholders saw the incremental 1.25 cents per unit in their accounts, and I’m still having a hard time believing that it actually happened. It’s the end of an era. Since the diversification initiative was announced, FGP has returned 7.3% on a total return basis, significantly outpacing the AMZ’s 18.7% loss over the same time period. So perhaps the era ending is a good thing, at least for the company’s unitholders.

So where does that leave us today? Excluding general partners, variable distribution partnerships, and monthly payers, 92 energy MLPs paid a distribution this quarter. With FGP raising its distribution, the longest streak now belongs to Cheniere Energy Partners (CQP) at 34 quarters paying the same distribution.

Kenny Chart

CQP has not raised its distribution since going public back in March 2007. But no one believes that the company can play the role that FGP once did, because CQP trades with the perceived fortunes of the US LNG export industry. It also yields just over 6%, which would suggest that more than 80% of MLP distributions are at risk. Even the most bearish of bears will find that hard to swallow.

In second place is NuStar Energy (NS) at 17, which has turned it around under new CEO Brad Barron. Coverage is north of 1.0x for the first time in years, and though no guidance has been given on when management will recommend a distribution increase to the board, NS is believed to be in a position to do so, the current commodity environment notwithstanding. The only other company in double figures is Southcross Energy Partners (SXE), which trades in the single digits, has a yield approaching 30%, and needs sponsor intervention to keep things from getting worse.

Next is Calumet Specialty Products Partners (CLMT) with nine consecutive quarterly distribution of $0.685, but the jury is still out on whether they ought to convert to the variable distribution model utilized by other refining MLPs like Alon USA Partners (ALDW), CVR Refining (CVRR), and Northern Tier Energy (NTI). At eight in a row is Memorial Production Partners (MEMP), but the company has already announced a distribution cut for the upcoming quarter.

That leaves us with one name holding a streak of at least two years paying the same quarterly distribution: World Point Terminals (WPT). The company is headquartered in the Midwest, has paid the same quarterly distribution since its IPO, operates a relatively stable business, and is majority controlled by one individual. Sound familiar? Ladies and gentlemen, our next Ferrellgas. We only have to wait 18 years to see if this plays out.

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