By Corrie Driebusch
A gusher of U.S. initial public offerings of energy-focused
master limited partnerships has some money managers urging
caution.
Investors, drawn by the reputation of MLPs for stable, high
payouts and a central role in the U.S. energy boom, have poured
money into newly minted stocks from these companies, which mainly
own and operate oil and natural-gas pipelines and storage
facilities.
MLPs are publicly traded entities that pass on to shareholders
the majority of their income in tax-favored distributions. Most
MLPs earn money by charging oil-and-gas producers to transport or
store their products.
This year, a record $6.8 billion has been raised through MLP
IPOs, topping the previous all-time haul of $5.9 billion for all of
last year, according to Dealogic. Nearly $11 billion has flowed
into U.S. open-end energy-limited-partnership funds year to date,
and an additional $3.8 billion has flowed into
energy-limited-partnership exchange-traded funds, according to
Morningstar.
Among the 18 MLPs making their debuts this year were the two
largest IPOs ever in the group. Shell Midstream Partners LP raised
$1.1 billion at its IPO in October, and Antero Midstream Partners
LP sold $1.2 billion worth of shares in November.
But many MLP specialists warn that along with the boom have come
more companies that have less-attractive features, namely
businesses with high exposure to swings in energy prices, such as
refineries, and unstable distributions.
"If you were an investor pre-2005 and you threw a dart at a
board, you probably couldn't get in trouble" when it came to MLPs,
said Brian Watson, portfolio manager and director of MLP research
at Oppenheimer SteelPath MLP group of funds, which oversees $14
billion. "Now if I threw a dart at a board, I could end up with a
very risky company."
The top holding in the Oppenheimer SteelPath MLP Alpha Fund as
of Oct. 31 was Enterprise Products Partners LP, which at $76
billion in market capitalization is one of the largest publicly
traded energy partnerships and is up 19% this year.
In a period of low interest rates, the high distributions
offered by MLPs have been their main attraction. The Alerian MLP
index, a widely followed benchmark, yielded 5.6% at the end of
October. The MLP index has risen 12% this year, in line with the
S&P 500. On a total return basis, it is up 18%, five percentage
points ahead of the S&P.
Historically most MLPs grew by acquiring already-existing
pipelines or storage facilities from exploration and production
companies--often from parent companies that have carved out the MLP
as a separate entity.
But in recent years the natural-gas and energy infrastructure
boom has turned the pipeline and storage business into a growth
industry, enabling some MLPs to expand their payouts without as
much emphasis on acquisitions.
Through the end of the third quarter, the companies in the
Alerian MLP index have increased their distributions by 5.7% from a
year earlier, according to Alerian. And of the 50 names in the
Alerian MLP index, 44 names were also in the index at the end of
last year. Of these, 31 companies, or 70%, have raised their
distributions in 2014.
But not all new MLP listings deserve to be blockbusters, money
managers say.
One area that has drawn skepticism from some investors involves
MLPs whose primary businesses aren't energy pipelines or
storage.
USD Partners LP, which raised $155 million in an October IPO, is
one MLP whose stock has struggled. The company's main businesses
are rail terminals used to transport crude oil. The IPO was priced
at $17, and the stock closed Friday at $16.50.
Some of these nontraditional MLPs also don't promise steady
distributions. Among so-called variable-payout MLPs are CVR
Partners LP and Rentech Nitrogen Partners LP, which focus on
nitrogen fertilizer production. Shares of CVR are down 31% this
year and Rentech is down 34%.
"The asset class has morphed somewhat to include some more
fringe or tertiary type of infrastructure than the kind there were
originally," said Todd Williams, who manages MLP strategies and
separate accounts at Westwood Holdings Group, which manages $20
billion. Among the MLPs owned by Westwood funds as of Sept. 30 were
Western Gas Partners LP, up 18% year to date, and Access Midstream
Partners LP, up 12%.
Another group some fund managers say they are avoiding are
so-called upstream MLPs, which are in the exploration and
production business, and are therefore sensitive to falling oil
prices. With crude-oil prices down by about 30% since June, that
has become a front-burner issue.
Many managers are instead favoring traditional MLPs such as
Enterprise Products, which are so-called midstream operators that
collect revenue transporting oil and gas from one location to
another.
A particularly attractive group, the fund managers say, are MLPs
like Shell and Antero, which are spin-offs from established energy
companies.
Strong demand for this kind of traditional MLP played out in the
$1.1 billion IPO of Shell Midstream, which owns an interest in
pipelines controlled by Royal Dutch Shell carrying crude oil and
refined products. Shell priced its deal above expectations at $23
and sold more shares than it planned. It saw heavy demand despite
having a yield at the time of the deal of 2.8%, at the time the
lowest of any MLP IPO.
Shell Midstream opened 39% above its IPO price, and the stock is
now up 53% since the offering.
"Investors are primarily attracted to visibility of growth from
strong sponsors," said Chuck Park, head of Natural Resources Equity
Capital Markets at Goldman Sachs.
While some of these MLPs offer lower-than-average yields, they
provide greater predictability, fund managers say.
Leonard A. Weiss, senior vice president of investments for the
Weiss Wealth Management Group of Raymond James in Farmington,
Mich., says he keeps his clients, who are mostly retirees, out of
the nontraditional entrants in the MLP arena, though they may be a
good option for investors seeking higher risk and returns.
"For people over 50 who are looking to help secure their
retirement income, the midstream market is really where it's at
because it's so predictable," he said.
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