For the most part, MLPs have been largely insulated from the downturn in the oil market. That's largely the result of the long-term, fee-based contracts these companies sign, which keeps cash flow rather stable. That being said, this doesn't mean it's going to be smooth sailing for MLPs, as the oil market downturn is going to have an impact. One recent example of this isPlains All American Pipeline, L.P. , which recently reduced its growth guidance for 2015.
Continue Reading Below
Source:Flickr user Ray Bodden.
Growth is slowing
In its fourth-quarter earnings release, Plains All American Pipeline's CEO Greg Armstrong said that while the company is "well positioned to manage through industry down cycles," it's "not immune to the adverse impacts of a major step change in commodity prices." This is because that huge shift in oil and gas prices is "accompanied by a similar change in producers' activity levels." These activity levels directly feed into the growth of Plains All American Pipeline as it builds the pipelines and terminals that move and store the growing supply of oil and gas in North America. So, with that supply growth expected to slow, it will slow the partnership's growth in 2015.
As a result of this weakness, the company expects to spend less on capex than it did last year, with spending expected to drop by 9%. Because of this, and other factors, the company is trimming the mid-point of its acquisition adjusted EBIDTA guidance by 6.5% as well as its distribution growth target. Still, the company does expect to grow its payout by 7% this year, which is a lot better than many other energy-related companies that have either cut their payouts or eliminated them entirely.
Despite the weakness the company sees in the year ahead, it still sees a very robust opportunity to grow further down the road. Armstrong noted this by saying, "while the duration of the current down-cycle is unknown, our confidence in the North American crude oil resource base and its ultimate development remains high." Said another way, the near-term outlook is weak, but the longer-term outlook is still really good.
Continue Reading Below
Insulation provides protection from the storm
As I mentioned earlier, MLPs are pretty well protected from an initial downdraft in commodity prices because of fee-based contracts. However, they are not completely immune, as most have some commodity price exposure. Plains All American Pipeline, for example, noted this in its release as the adjusted segment profit at its supply and logistics segment dropped 17% over 2013 levels because of less favorable NGL and crude oil market conditions. While the company was able to make that up elsewhere, this limited exposure is still a headwind and will have an impact on future results.
Plains All American Pipeline, however, is far from the only MLP to see a small hit from the turmoil in the oil market. Magellan Midstream Partners, L.P. recently noted that it has about 15% of its operating margin tied to commodity prices. Because of this, the company's financial results will be affected by $2 million for every $1 change in the price of crude oil in a year. So, while commodity prices will pinch, prices won't have a great impact on the company's ability to grow its distribution, which it still sees growing by 15% this year and 10% in 2016.
Kinder Morgan , likewise, has a bit of exposure to commodity prices. Every $1 move in the price of oil impacts its bottom line by $10 million. However, that's really pocket change for the behemoth as 94% of the company's cash flow this year is either hedged or fee-based, which is why its growing dividend is secure. That said, this impact, while limited, will likely cause future results to be less robust than we'd see at higher commodity prices.
MLPs are going to feel some impact from lower commodity prices. Part of this impact will be from less growth projects being built due to a slowdown in activity, while another side of the impact will be from some direct exposure to commodity prices. However, the overall impact will be nowhere near what producers or oil-field service companies will feel, as most of an MLP's cash flow is fee-based, which should keep distributions both flowing and even growing.
The article MLPs Start to Feel the Weight of the Oil Market Downturn originally appeared on Fool.com.
Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends Kinder Morgan and Magellan Midstream Partners. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.