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Depressed Commodity Price Environment a Distribution Concern?

08/20/2015 9:00 am EST

Focus: MLPS

Michael Berger

President & Founder,

While commodity price volatility should continue to act as a headwind, Michael Berger, of, thinks the following stocks will outperform the market on a longer-term basis.

From an acquisition and initial public offering (IPO) standpoint, the past two years have been banner years for Master Limited Partnerships (MLP). The depressed commodity price environment, however, has ignited concerns for many investors, specifically when it comes to distributions.

MLPs pay out a majority of their available cash to investors as distributions. Poor market conditions have forced a number of partnerships to cut or suspend their distributions and we expect to see more cuts during the back half of 2015 and in 2016.

LINN Energy Plummets After Announcing Plans to Suspend Distribution

In late July, LINN Energy (LINE) announced plans to suspend its distribution as the company adjusts to the low oil price environment and focuses on improving its balance sheet. Since the announcement, the market did not react favorably to this news and shares fell by more than 50%.

Mark Ellis, Linn’s chief executive officer, said, “The board and management believe this suspension to be in the best long-term interest of all company stakeholders.”

Expect More Distribution Cuts or Suspensions

Upstream MLPs are focused on the exploration, recovery, development, and production of crude oil, natural gas, and natural gas liquids. These partnerships are considered to be more risky than midstream MLPs that are focused on the gathering, storage, and transportation of oils and gases.

While we have been optimistic that at least one upstream MLP would make it through the weak pricing environment, at this point, we expect to see all partnerships realize a substantial distribution cut. Out of all upstream partnerships, we expect Memorial Production Partners (MEMP) to hold up the best because it is has the deepest hedge and protected itself from the price related cash flow volatility faced by its peers. In our view, MEMP will likely to cut its distribution in the third quarter as the partnership builds coverage and saves cash in this weak price environment.

If the low commodity continues—or gets worse—we could see distribution cuts by Atlas Resource Partners (ARP) and EV Energy Partners (EVEP).

Forward Guidance

Looking ahead, while commodity price volatility should continue to act as a headwind, we continue to recommend incorporating well positioned MLPs into any well diversified portfolio. We believe the following stocks will outperform the market on a longer-term basis: Antero Midstream Partners LP (AM), Enterprise Products Partners LP (EPD), Energy Transfer Equity LP (ETE), Genesis Energy Partners LP (GEL), Magellan Midstream Partners (MMP), Plains GP Holdings (PAGP), Tesoro Logistics (TLLP), Targa Resources Corp. (TRGP), and Williams Partners LP (WPZ).

Michael Berger, Founder and President,

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