The energy-based MLP--- is it a business model that's about to fall out of bed?

heezsafe

John Kimelman of Barron's summarizes, and points readers to, an article written by one independent investment advisor who believes the financial operating structure of the MLP may not survive in its current form. Energy companies with conventional structures, that may weather the continuing storm better over the near term, are mentioned at the end of his entry.
http://www.barrons.com/articles/why-the-mlp-business-model-may-be-a-goner-1443476002?mod=BOL_hp_highlight_4

The article, written by Brian Nelson of Valuentum Securities, can be found here:
http://valuentumbrian.tumblr.com/post/130073604290/warning-the-mlp-business-model-may-not-survive
Now that bankers are re-evaluating price decks and borrowing capacity [...] most master limited partnerships and midstream corporates may have to make the difficult decision to either cut their distributions/dividends or suspend growth plans in them altogether, a move that would completely negate forever the dividend-based equity pricing framework used by brokerage houses, leading to a further unraveling of equity prices. Falling stock prices would then weaken credit quality, and a bust would truly ensue, as shares finally revert back to traditional, tried-and-true free cash flow valuation processes, as opposed to one based on a financially-engineered payout.

scott

I don't agree. I do think that there will be continued consolidation in the energy pipeline industry. Energy Transfer bought Williams earlier this week and now that is one of the largest energy enterprises in the world and the largest pipeline company. You're going to have a handful of giants and an assortment of smaller players and that's it. Upstream MLPs are having difficulty - Linn being a huge example- and that's no surprise. Are there smaller midstream players that are going to have difficulty? Sure, things aren't good in the energy field and smaller, perhaps overleveraged players are going to have difficulty. Look at Loews (L) and its subsidiary Boardwalk Pipeline (BWP), which has gotten obliterated. Loews also dumped its Highmount Exploration energy subsidiary, too.

MLPs, REITs, there's going to be weaker players no matter a particular structure.

Concern has spread to midstream and I think that has created opportunities for companies like ETE, EPD and MMP. I'm far too groggy to go into much detail this morning, but I agree with a fair amount of the comments section in the article and it's a little amusing that Barrons is linking to Tumblr posts of a newsletter group that is one of the more frequent posters on SeekingAlpha. Didn't Barrons also give its stage over to Hedgeeye when they wanted a platform for their bear raid on Kinder?

Mark

For a rebuttal to the Barron's article go here: http://mlpguy.com/archives/5181

Writers on or for Barron's have been after MLP's for some time now beginning with the dreck they published on Kinder Morgan. I'm not sure what their agenda is but I'm disappointed that their editorial board deems this nonsense worthy of publication. Sells magazines I guess.

scott

After becoming more caffeinated and a few hours later, I'll note:

Still have the same feelings on the MLP structure - that it isn't going away.

However,

Do I think the MLP sector is going to thrive in the years going forward? Probably not. It will remain something of a "niche" and I don't think that there's anything really wrong with that.

I do occasionally think that the structure has caused a significant disconnect between price and value, such as the instance of BPY, which I think is an instance where the MLP structure has resulted in people staying away from it (plus, it's not a REIT, so it's not bought up by REIT and probably many general RE funds, etc.) This has been mentioned by management. That said, I'm more than happy to sit on it and reinvest dividends in the meantime.

Excellent link from Mark- that's well worth a read.