Individual investors across the country have invested heavily in Master Limited Partnerships (MLPs) — tax-exempt, publicly traded companies that own pipelines, storage tanks, and other cash-generating infrastructure related to energy production. Energy MLPs are commonly divided into three types: upstream, midstream, and downstream. These designations pertain to the movement of energy-related natural resources from producing wells or mines (upstream) through storage and transportation (midstream) to end-users (downstream). Upstream MLPs operate at or near the source of the commodity and tend to be involved in exploration, drilling, and production activities. Midstream MLPs engage in gathering, processing, compression, transportation, and storage – i.e., activities involved in moving the product from upstream locations. Downstream MLPs are generally engaged in refining, marketing, and distribution activities.
Retreat from MLPs
MLPs once were very appealing because most of their income gets distributed to unitholders and yields were well in excess of the anemic returns available from bonds. But the mad dash toward MLPs has turned into a full-scale retreat. Why? The North American energy production boom has gone bust, and crude oil prices have been in freefall. The Alerian MLP index, which tracks 50 large and midcap energy MLPs, fell 38% in 2015, compared with just a 1% drop in the S&P 500.
Many investors got into MLPs without understanding exactly how they operate or the level to which their performance depends on prices of the commodity they produce and service. Falling oil prices caused MLP shareholders to rid themselves of their energy exposure, including their MLP shares. Hardest hit because of production cuts were upstream MLPs – those that generally build, operate and maintain wells. These upstream MLPs have cut, suspended, or eliminated distributions to unitholders over the past year.
Until recently, however, many midstream and downstream MLPs had been able to increase their distributions consistently despite lower stock prices. That changed in January, when the first downstream MLP toppled. Global Partners LP, an owner of petroleum terminals and the owner or supplier of more than 1,000 gas stations in the Northeast, cut its distribution to unitholders for the first time ever. Thus, MLPs located downstream from the commodity source are not immune from the problems plaguing upstream MLPs.
Oil and Gas MLPs Unsuitable for Most Investors
Stockbrokers sold MLPs to lots of customers who either shouldn’t have bought them or who bought too large a concentration of them. Brokers told customers that MLPs were good income-producing investments that would return a higher yield than more traditional products like bonds. But the brokers neglected to disclose some important things about these investments. Here are just a few:
- Investing in natural resources infrastructure is risky due to the swings in energy and commodity prices. When the price of oil and gas fluctuates, MLPs experience significant volatility.
- MLPs require long holding periods. Their illiquidity makes them unsuitable for investors who will need quick access to cash or who simply don’t want to have their money tied up.
- Energy-related limited partnerships are high-commission products. Thus, too many brokers recommend and sell them to line their own pockets, even when the investments might be unsuitable for their customer.
If you’ve lost money in an energy-related Master Limited Partnership investment, contact us. today for a free evaluation. We’ll tell you whether you have a potential claim and we’ll give you a candid assessment of whether it’s worth pursuing. If it is, we’ll handle your case on a contingent fee basis, meaning we won’t charge you a fee unless we’re successful in recovering money on your behalf.