Matt Zborowski
Staff Writer
Starting in 2013 when crude oil prices were hovering around $100/bbl, a new trend emerged by way of the master limited partnership (MLP). Since January of that year through the end of 2014, roughly 30 new MLPs entered the market in North America, bringing the total number of publicly traded energy MLPs to more than 120, according to analysis from Ernst & Young LLP.
At the time, Greg Matlock, E&Y MLP leader in the US, explained why they had become all the rage: "With interest rates at persistently low levels, MLPs-and the broader IPO markets-remain an attractive option," he said. "Many oil and gas MLPs in 2014 outpaced and outperformed expectations and were welcomed with opened arms from investors. Further, increased interest in other growth and yield-based investment vehicles like the 'YieldCo' structure and the 'non-US MLP' structure have driven-and are expected to continue to drive-interest in the sector of accessing the public markets."
E&Y pointed out that, naturally, the prominence of MLPs in the energy sector mirrored the rapid growth in US energy production. During 2014, a total of 11 North American oil and gas MLP offerings generated proceeds of $5.145 billion. The year also saw the largest MLP IPOs ever from Antero Midstream Partners LP and Shell Midstream Partners LP, as well as the megamerger of one of the MLP pioneers, Kinder Morgan Energy Partners, in August when oil prices were beginning their plunge.
My, how things have changed
More recently, low oil prices have made it difficult for MLPs to justify building out oil and gas infrastructure, and payouts to investors are getting cut, notes international law firm Baker Botts LLP. In the past year, 13 MLPs have trimmed their payouts, and some have cut dividends by more than 30%.
During this year's first half, only 9 IPOs took place in the US, which was cut in half year-over-year. In the second half thus far, there hasn't been a single oil and gas MLP IPO, a fact highlighted by Hillary Holmes, Baker Botts partner focusing on capital markets transactions for energy MLPs, while speaking with OGJ. She advised on the IPOs of Columbia Pipeline Partners LP and Shell Midstream Partners.
"There's definitely a stall in the MLP IPO market," she said, noting that there hasn't been one since June. She emphasized that energy markets "tend to move in a heard," and that's what we're seeing here. Noble Midstream Partners LP this month postponed its previously-announced IPO "as a result of unfavorable equity market conditions," according to a news release from the company, which added that it "will continue to evaluate the timing for the proposed offering as market conditions develop."
Holmes' outlook for MLP IPOs next year isn't too grim, as she doesn't expect it will be as bad as 2009, when no IPOs occurred in the midst of the recession. "In order to thrive in the energy industry, the MLPs need capital," she explained. "They will find a way to access it and to grow, even as we all wait for oil prices to increase." For midstream MLPs in 2016, she expects "a continuation of the recent trend of private placements and public offerings focused more on institutional investors," she said. "This allows flexibility as to when exactly they access the capital markets and which investors they target.
"The first MLP IPO will likely be a traditional midstream MLP with a strong sponsor, and hopefully the market will open up a bit as the year progresses. Dropdowns in midstream MLPs will continue and both upstream and midstream MLPs should take advantage of the [merger and acquisition] opportunities that bankers predict will become more available later in 2016."
Growth, Holmes said, will likely be slower than we saw at the peak of 2014. "Remember, MLPs are run by folks in the energy industry and they understand how to navigate the down part of the natural cycle that the oil and gas industry has gone through for decades. Also remember that they are a yield vehicle and a tax efficient investment-investors will continue to be attracted to them for that reason."
