Why This Big Midstream Partnership Fell 17% in August

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What happened

Shares of midstream oil and gas partnership Plains All American (NYSE: PAA) fell 17% in August. Almost all of that drop, however, transpired on one day. At its nadir, Plains' units were down over 27% last month.

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The full-month decline actually represents a partial recovery from the worst of the drop. Note that general partner Plains GP Holdings, L.P. (NYSE: PAGP) also fell by 17% in July, which makes sense, since its results are basically tied to Plains' results.

So what

The main driver of the steep price drop was Plains All American's August 7th announcement that second-quarter results were weaker than expected. It also lowered its full-year guidance at that time and, to make matters even worse, it provided a less-than-inspiring outlook for 2018.

But the really big news from that release was the fact that Plains was going to change "the way we plan to manage our distribution." That telegraphed a distribution cut, which is never looked on favorably in the partnership space.

Limited partnerships are, by design, income vehicles. At the end of the month, Plains All American followed through and trimmed the distribution 45%. (The distribution was cut at the general partner, as well.) That was the second cut in roughly a year.

Now what

When Plains first cut its distribution in late 2016, management suggested the move had put the disbursement at a sustainable level. That clearly wasn't true, since less than a year later, it was forced to cut it again. At this point, investors would be right to question management's credibility.

That said, a lot of damage has been done, and the pipeline company owns a vast network of largely irreplaceable assets. More aggressive investors might want to do a deep dive. But anyone who needs steady income should look for better options.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.