by Deon Daugherty, Senior Editor
Upstream master limited partnerships (MLP) have continued their descent into the rough waters of financial struggle that oil and gas corporations’ have fought since crude prices dropped last year.
The struggle of upstream MLPs became real this summer, when several saw unit prices drop significantly. At the time, analysts said the MLPs weren’t hedged appropriately, they spent too much money on acquisitions and they carried too much debt. Those issues haven’t dissipated. In fact, upstream MLPs have continued to decline.
A merger between three partnerships hasn’t managed to raise the interest in the acquirer, Vanguard Natural Resources (Nasdaq: VNR), which showed a 20 percent drop in its unit prices by mid-morning Sept. 14, from $10.57 per unit to $8.43 per unit, since July. In addition to the decline at Vanguard, others including Linn Energy (Nasdaq: LINE) and EV Energy Partners (Nasdaq: EVEP) have also dropped.
However, while Linn and Memorial Production Partners LP (Nasdaq: MEMP) were removed from the Alerian MLP Index, the Dallas-based MLP ratings firm added Vanguard.
An MLP is a publicly traded partnership that provides tax benefits to the firm and regular distributions of profits to its investors. As oil prices have continued to decline, so has the ability of upstream MLPs to have enough cash flow to pay a stable quarterly distribution.
Alerian rates 50 MLPs based on a float-adjusted, capitalization-weighted formula. The latest rebalancing will be set Sept. 18.
Hinds Howard, CBRE Clarion Securities vice president and senior financial analyst, told Rigzone that leverage for upstream MLPs tends to be higher compared to that of corporations, which will make the upcoming borrowing base redetermination more of a challenge.
“Not much to get excited about with upstream MLPs these days, and they are also becoming less relevant to MLP institutional investors as the Alerian Index will have just one upstream MLP (Vanguard) after the latest rebalancing,” he said.
Analysts at Wells Fargo agreed that upstream MLPs are underperforming based primarily on continued volatility in commodity prices.
“We remain cautious on the group,” the said in a recent note to investors. “Outside of a sustained rally in commodity prices, we believe the group is unlikely to outperform. Elevated leverage, limited access to capital and concern around future potential distribution reductions [or] suspensions will likely weigh on valuations in the near term.”