On April 3, 2020, in a research note to clients (“Navigating Credit Risks in the Midstream Sector”), Bank America – Merrill Lynch noted that the rating agency Standard & Poors believes that “over 40 producers” in the midstream energy sector “will be rated in the CCC category” and that it “sees potential for bankruptcies or defaults near-term” in the sector.
S&P expressed a concern “about commodity prices, storage limitations and shut-ins. S&P believes the solvency of producer customers in assessing midstream ratings is a relevant question given the potential for Chapter 11 or even Chapter 7 cases.”
As we have previously noted, 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.
Master Limited Partnerships (MLPs) 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.
A number of energy MLPs have already been forced to delever their balance sheets and have started to slash their amount of distributions. Just recently, for example, Plains All American Pipeline LP (NYSE-PAA) cut their May distribution to $0.18 from the $0.36 that it paid in February, Enable Midstream Partners LP (NYSE-ENBL) cut their May distribution to $0.16525 from the $0.3305 that it paid in February and DCP Midstream LP (NYSE-DCP) cut its May distribution to $0.39 from the $0.78 that it paid in February.
If you are an investor that suffered MLP losses, you should consider all legal options. If you wish to discuss your particular situation and the potential for the recovery of your investment losses, or you have information of interest, please contact us for an evaluation of your potential case.