I own several midstream energy master-limited partnerships (MLPs), which have gone from being seemingly safe income plays to being as hard hit as other more obviously risky plays due to the present market meltdown. But that doesn't mean that the companies themselves have become any riskier. What it does mean is that you may have to pay closer attention to their balance sheets than you might have previously. Having done that, I have one that I think presents an opportunity here. But first, a little background.Insiders were (and still are in some cases) active buyers in these firms, which transport oil, gas and related liquids from where they are produced (downstream) to where they are refined and consumed (upstream). Terminalling and storage of these commodities are also usually a part of the business mix of most midstream MLPs.
Sure, midstream MLPs aren't the sexiest positions around, but I make it a point of presenting insider-inspired investment ideas for all investor types. MLPs seemed a better place for yield than the financial sector for sure. That is still the case, but the antics of the smartest guys in the room have lowered the safety net for MLPs as well. They have fallen anywhere from 15% to 25% in recent weeks. The discount is, unfortunately in this case, logical. As we now know, the overpaid hot shots in our once-respected financial institutions screwed up so royally that they have seized up credit markets, and also economic growth. A recession (which I suspect we are already in) leads to less energy consumption on the margin, and less volume of oil and gas consumed, which means lower revenues for MLPs. The price of oil and gas has already slid in expectation of the slowdown, and exploration and production firms have duly announced reductions in drilling budgets, given the less attractive price. So it's not a matter of MLPs having liquids no one wants in their pipelines. The producers will be putting less volume in the pipelines to begin with.
As a rule of thumb, smaller midstream MLPs have always represented higher-risk bets, and have needed to offer higher yields to compensate for that fact. With relatively smaller infrastructure to generate revenues from, they have far less room for error when it comes to down time due to unpredictable events -- like hurricanes. This is not lost on capital markets, and if a small MLP also needs to raise money in the coming months, they may not get favorable terms -- if they get them at all.
The firm also has a $1.75 billion revolving facility with a consortium of banks, with no one bank responsible for more than $85 million of the facility. That's a broad enough lender base to make me feel comfortable that the revolver won't evaporate if and when more banks hit the skids. Enterprise made a decision to reduce its distribution growth earlier this year in order to prefund infrastructure projects. Whether by luck or forethought, it was the right move. If you are wondering if you should stick with your own beaten-down midstream MLPs--or buy into more of them--just make sure their balance sheets are in order to weather the storm which could well get worse before subsiding.