What: Investors are bailing on MLPs today with a number of top midstream companies falling by double digits:
Data source: S&P Capital IQ.
So what: Today's move in the MLP sector is partially tied to crude oil prices, which are getting crushed today, with oil down around 6% to nearly $37.50 per barrel at 2:30 p.m. EST. While most MLPs don't produce a drop of oil, some have direct exposure to oil because they process natural gas liquids, or NGLs, which derive their value from oil prices. Energy Transfer Partners, Targa Resources, MPLX, and Williams Partners in particular are really taking it on the chin today because these companies have higher exposure to NGLs.
That said, today's downdraft has even more to do with future growth concerns than the drop in the price of oil. That's because MLPs use debt and equity to fund growth and that will be much harder to do with equity prices being crushed and growing concerns surrounding MLP debt. Plains All American Pipeline saw that firsthand this afternoon after Moody's changed its outlook from stable to negative, though it did affirm the company's Baa2 rating. That said, the rating agency is worried about Plains All American's 5.4 debt-to-EBITDA ratio and sub-1.0 distribution coverage ratio.
Now what: OPEC's decision to continuing pumping at full capacity means that oil prices could remain low for a while longer. That's going to impact the cash flow at some MLPs that relied on higher oil prices to deliver juicy NGL margins. However, what's more worrisome is that MLPs can no longer count on high equity valuations or open credit markets to fund growth. With debt options tapped out and equity values falling fast, it calls into question the long-term viability of the MLP business model, and the the implication is that MLP distributions could be going away with these companies using that cash to either fund growth or repair their balance sheets.
The article Here's Why MLPs Are Getting Slammed Today originally appeared on Fool.com.
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