Some MLPs Hold the Line on Distributions

Among several energy master limited partnerships (MLPs) that had been predicted by analysts at Wells Fargo to cut their cash distributions were American Midstream Partners L.P. (NYSE: AMID) and Williams Partners L.P. (NYSE: WPZ). Both companies said Monday morning that they will maintain distributions at previous levels for the fourth quarter of 2015.

To be fair to Wells Fargo, the report in Barron’s did not say when the analysts expected distributions would be cut or eliminated, and the analysts did get it right on CSI Compressco L.P. (NASDAQ: CCLP), which cut its cash distributions by about 25% last Friday. Other MLPs that Wells Fargo expects distribution cuts from are Archrock Partners L.P. (NASDAQ: APLP), Crestwood Equity Partners L.P. (NYSE: CEQP), and Energy Transfer Partners L.P. (NYSE: ETP) and Energy Transfer Equity L.P. (NYSE: ETE), the general partner of Energy Transfer Partners, L.P. (NYSE: ETP).

The MLPs that Wells Fargo expected to shave distributions all have debt-to-EBITDA ratios of 4.7 or more. The capital markets are unlikely to front these companies any more cash due to the high levels of debt, and that leaves the MLPs few choices, all of them bad.

If they cut capital spending, their businesses won’t grow and they may not be able to maintain, let alone raise, their cash distributions. If they cut distributions to conserve cash in order to finance modest growth, common unitholders will bail. Unitholders only love MLPs for their returns, not for their huggability.

Other options include asset sales, but with nearly every MLP pretty much in the same boat, there’s little expectation that price premiums will be thick on the ground. Or the partnerships can issue more equity at huge discounts that make current unitholders mad, or offer preferred equity with handsome interest payments to preferred shareholders.
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We’ve already noted the boost to the Williams companies, and the boost to American Midstream was a solid 21% shortly before noon, with shares trading around $6.75 in a 52-week range of $3.80 to $19.96.

CSI Compressco traded up nearly 2.5%, at $6.75 in a 52-week range of $5.26 to $22.15. The common units closed down 9.1% on Friday.