Master limited partnerships are experiencing turmoil, as low energy prices and related issues hurt valuations. But the business model itself – which churns out distributions to investors – is sound, according to Cushing Asset Management.
“The model is not broken, it’s just more challenged right now,” said Jerry Swank, a founder and chief investment officer of Cushing Asset Management, a unit of Swank Capital focused on energy investing, during a conference call.
The ability to export crude oil – which appears to be gaining traction on Capitol Hill – “would be a game changer for the space,” said Kevin Gallagher, portfolio manager and senior research analyst with Cushing, during Tuesday’s webinar. “There are bright spots in the industry,” despite the fact that we are in the downward curve of a cycle.
In the third quarter of 2015, earnings were “pretty solid,” Gallagher says. The industry’s tracking index, the Alerian MLP Index (AMZ) had distribution growth of nearly 9% year over year. General partner MLPs (or GPs) had distribution growth of about 16%.
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However, the sector – as measured by price returns – was down 45% as of Dec. 11.
MLPs generally pay dividends from their cash flows, not from debt and equity, which is used to fund growth, Swank points out. “They are making good money when the cost of capital is low for new projects.”
Plains All American Pipeline (PAA), for instance, isn’t planning distribution growth for 2016, Swank explains. “But they have new projects set for 2017 and could [boost distributions] as that comes online,” he said.
On Dec. 8, pipeline operator Kinder Morgan (KMI) said it would cut its distribution by 75%. A few days later, though, it said it planned to fund dividend growth of 6% to 10% in 2016.