In expanding beyond traditional pass-through operations, the MLP universe is no longer mostly composed of fee-based businesses such as pipeline and storage operations. It now includes more cyclical components of the energy value chain such as refining, fertilizing, frac sand services and drilling. To be sure, MLPs involved in exploration and production, gathering and processing, coal, shipping, natural gas storage and the wholesale and retail distribution of gasoline and propane have existed for some time and all of these have varying levels of cyclical exposure to commodity pricing, weather and other macro conditions. But these MLPs, like their more stable pipeline counterparts, have some balance sheet cushion to handle modest variability to cash flow, which enables them to at least plan, if not guarantee, minimum quarterly distributions (MDQs) for their unit holders.
While more time is needed to evaluate the impact of variable rate MLPs on the broader MLP universe, reflecting on the history of the space highlights the fact that these “new”-category MLPs are not actually new. In the 1980s, the early years of the industry, the sector was filled with partnerships involving refining, fertilizer, timber and other cyclical businesses. Most of these MLPs failed as they were unable to maintain distributions when oil and gas prices dropped. As a reaction, the space has been dominated by pipelines and other stable midstream services until recently. Does this past year’s sharp rise in MLP IPOs, especially in more cyclical areas of the energy industry, signal a peak in margins or an MLP bubble?
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