Is the MLP Mojo Gaining Momentum?

“Forced liquidations and panic selling may be over, or may be exacerbated in the next two months by tax loss selling before year-end,” he told Rigzone. ”We would still focus on higher quality, more liquid MLPs that will hold up better if emerging market jitters hammer the broader equity market and oil prices again. We are likely in an industrial recession, not just an energy decline. Until that change in the landscape is better appreciated, I don't think heroics are warranted.”

Swimming Upstream

Without the bounty of $100 oil, exploration and production MLPs just don’t have the assets to make the model work. One by one, the handful of upstream MLPs this year has come under humiliating scrutiny.

“I think their business model has proven to be really, really challenged and they’re not great businesses,” Howard said.

If no one is completing new wells and producing, that challenges the cash flow.

“That has started to creep into the thought that maybe MLPs didn’t have sufficient cash from their existing businesses to keep making distributions. There was just a lot of fear out there that seems to be sparked by social media – anybody saying anything bad about MLPs – and they get crushed,” he said.

Greg Matlock
Greg Matlock, MLP Leader, Ernest & Young LLP
MLP Leader, Ernest & Young LLP

“I don’t see any new upstream MLPs coming out. And I think that given that they’re focused on higher cost basins. I think the business model works really well when we’ve got $75 oil and above, but if we stay here for an extended period of time – I don’t know if they’re going to go away – but they’re going to be certainly ignored by a lot of people.”

Matlock said whether an upstream MLP business model works is determined one company at a time.

“The past couple of months have obviously been trying for a number of upstream MLPs. But I think there is a market for them. I still think there’s a place for an upstream MLP,” he said, noting the success of some variable rate distribution MLPs in which the distribution is allocated but no specific rate is promised.

“It’s still a very company-by-company, very specific inquiry, as to whether the MLP ride is up. There has kind of been a flashlight on upstream MLPs. I still think it makes sense for some, but there’s definitely a heightened scrutiny there.”


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