Master Limited Partnerships are pass-through entities structured as publicly traded partnerships (PTPs). MLPs pay no corporate-level taxes and taxes are instead paid at the individual unitholder level. In addition to avoiding double taxation, a portion of the cash distribution paid by an MLP is typically tax deferred at 50-100%. MLPs usually have a limited partner (LP) and general partner (GP). MLPs pay out the bulk of operating cash flows as distributions to LP and GP unitholders. Energy MLPs predominantly operate in the midstream energy sector including: transportation (pipelines), storage (terminals), gathering, processing, and other methods of handling natural gas, crude oil, and refined products. There are also other types of Energy MLPs engaged in oil and gas exploration and production (E&P), oilfield services and refining.
On March 17, 2020, Fitch Ratings downgraded senior notes to ‘A’ from ‘AAA’ and preferred shares to ‘BBB’ from ‘AA or ‘A’ of 10 midstream energy closed-end funds (CEFs) following severe declines in portfolio values that eroded the funds’ asset coverage ratios. Fitch also placed all securities on Rating Watch Negative reflecting the potential for additional unrealized losses as a result of asset price declines and/or realized losses in the event the funds are required to sell further assets in order to deleverage.
The recent decline in valuations in the midstream and master limited partnership (MLP) energy sectors has been more rapid than during the 2008 financial crisis and the 2015-2016 energy market stress.
In fact, over a 45-day period since mid-February 2020, which is a typical market value exposure period for CEFs, the Alerian MLP index has decreased 69%, almost double its 37% decline during the worst 45-day period in 2008 and more than double the 30% decline in 2015-2016
As most MLPs are focused on a single industry or industry segment, investors have concentrated exposure to the volatility of that industry or segment. Changes in the price of commodities in that industry could impact the amount of income that an MLP generates or the ability of the MLP to maintain or expand its operations. Because most MLPs are currently in the energy sector, particularly in the pipeline or energy storage industries, MLPs can be acutely sensitive to shifts in oil and gas prices as have been recently experienced.
If you are an investor with concerns about your exposure to MLPs, you should consider discussing the issue with competent legal counsel. If you would like to discuss your situation and potential for recovery of any investment losses, please contact us for an evaluation of your potential case.