Energy

Dividend Investors Face New Round of Lower Distribution Worries From Top MLPs

Jon C. Ogg

Published: August 8, 2017 2:50 pm

Last Updated: January 12, 2020 9:20 am

It is no secret that investors hate when a company lowers its dividend payments. After all, close to half of all long-term gains come from dividends and the ability to reinvest dividends. Many retirees and other investors also depend on those checks to supplement their living.

The world of master limited partnerships (MLPs) is peculiar when it comes to the energy sector, because its payouts per unit are considered distributions rather than traditional dividends per share from corporations. Either way, MLP investors also hate seeing their distributions lowered.

Plains All American Pipeline L.P. (NYSE: PAA) saw its units trade lower by more than 17% to $20.78 on Tuesday, and shares hit a 52-week low of $20.00, after the MLP announced an unexpected planned distribution cut along with its lowered guidance.

The issue identified by Plains All American was that its profits were said to be evaporating in its outfit’s supply and logistics. Even after a large drop, Plains All American still has a market cap of about $15.25 billion. Plains GP Holdings L.P. (NYSE: PAGP) was also effected, with its units trading down 16.7% to $21.52, in a 52-week trading range of $14.44 to $36.09. Its market cap is still almost $12 billion.

What matters here is that the MLP-investing market just was not really braced for even more distribution cuts after what had been seen in 2015 and 2016. The good news is that some MLPs are still able to raise their payouts. The bad news is that this being unexpected casts a shadow over the whole group of MLPs, and that means even the strong individual units and even the closed-end funds and exchange-traded funds (ETFs) that track them.

Plains All American would have now been an 8.5% yield-equivalent without the distribution cut. With both of the Plains having an aggregate value that makes them a top holding of closed-end funds and ETFs, it is fair to wonder if other surprises are lurking for MLP investors.

One traditional attraction for MLP investors is that part of each distribution is income and part is considered a return of capital — and the latter comes with tax deferrals or may not be taxed at all. Payouts as dividends from corporations are generally funded out of earnings and cash flows, and they rarely have tax benefits like the MLPs.

ALPS ETF Trust Alerian MLP ETF (NYSEMKT: AMLP) is the key ETF that tracks MLPs and it had a $10 billion level of holdings on last look. Plains All American Pipeline was the fund’s fourth largest holding, with an 8.32% weighting. Other large MLP holdings (and weightings) were as follows: Enterprise Products Partners L.P. (NYSE: EPD) at 9.87%; Energy Transfer Partners L.P. (NYSE: ETP) at 9.83%; and Magellan Midstream Partners L.P. (NYSE: MMP) at 9.82%. The Alerian MLP ETF was last seen down 2.9% at $11.44.

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Plains All American Pipeline also was listed as the sixth largest weighting (6.3%) of the $2 billion closed-end MLP fund Kayne Anderson MLP Investment Co. (NYSE: KYN). The fund has a market value of about $2 billion, and its shares were last seen down 2% at $17.60.

The Tortoise MLP Fund Inc. (NYSE: NTG) counted Plains All American as the third largest holding, with a 7.0% weighting, behind Energy Transfer Partners (9.7%) and Enterprise Products (8.7%). The Tortoise MLP Fund is shown to have roughly $1.5 billion in total assets, and its shares were last seen down 4.4% at $18.34.

There is also the ClearBridge American Energy MLP Fund Inc. (NYSE: CBA) closed-end fund tracking MLPs. This is a Legg Mason fund, and Plains All American is not even a top 10 holding here. This has $793 million in total assets, and its drop on Tuesday was by 2.45% to $8.56. The ClearBridge American Energy MLP Fund has a 52-week range of $8.06 to $10.54. Its yield is closer to 9% today, based on the current quarterly payouts so far in 2017.
Even Goldman Sachs has its foot in closed-end funds for MLPs. The Goldman Sachs MLP and Energy Renaissance Fund (NYSE: GER) was last seen down 2.1% at $6.95. This has $858 million in total assets, and its distribution rate was listed as 9%. Plains All American was the fifth largest position, with an 8.2% weighting.

The Goldman Sachs MLP Income Opportunities Fund (NYSE: GMZ) is a second closed-end fund from Goldman Sachs, with $655 million in total assets. Plains All American had a 5.4% weighting and was also the fifth largest holding. This fund was last seen down just 1% at $9.37, with a current distribution rate of 8.8%.

At the other end of the spectrum is Kinder Morgan Inc. (NYSE: KMI). This is perhaps the largest infrastructure pure-play in the energy sector, but it went back to a corporation structure rather than keeping its MLP structure. Kinder Morgan recent rallied after it said that it would be resuming dividend hikes and buybacks, and its yield is now just about 2.5%. Kinder Morgan is still held by some of the MLP closed-end funds but is not in most of the key ETFs due to its structural change. Kinder Morgan shares were down 1.6% at $19.83 in sympathy with the group, and its 52-week range is $18.31 to $23.36.

Other key moves lower in top MLP units were seen as follows:

• Enterprise Products Partners was down 1.2% at $26.30 and its yield is 6.3%. It has a market cap of $56.5 billion and is involved in every aspect of the energy infrastructure markets.
• Energy Transfer Partners has a $22.5 billion market cap after its units fell by 2.2% to $19.30, and it has a 10% distribution as a yield-equivalent. Its 52-week range is $18.31 to $31.49.

As far as the part of the Plains All American call that went wrong, Chairman and CEO Greg Armstrong said:

Unfortunately, we continue to experience significant downward pressure in our margin-based Supply and Logistics segment. As a result, we updated our full-year 2017 Adjusted EBITDA guidance and our 2018 preliminary forecast. The updated 2017 guidance reflects a downward revision of $185 million, or 8%, primarily associated with the Supply & Logistics segment. Our 2018 preliminary forecast now includes a range with respect to our Supply & Logistics segment, from $100 million to $300 million.

The revisions to our updated 2017 Adjusted EBITDA guidance are associated with our Supply and Logistics activities, primarily due to a lack of visibility for crude oil and NGL arbitrage opportunities that we have historically been able to capture with our asset base and business model and margin erosion in our crude oil and NGL supply activities… we are taking a number of actions to ensure we are responsive to the market changes experienced by our Supply and Logistics businesses. These actions include changing the way we plan to manage our distribution and taking other business, financial and balance sheet management actions.

It seems that no one likes seeing their dividends cut. Obviously that still pertains to distributions as well. Now MLP investors will just have to wait and see if their distributions at other MLPs are safe or at risk.