Master Limited Partnerships (MLPs)
Master Limited Partnerships ("MLPs") are generally associated with the Oil and Gas industry. Usually, these entities trade publically on stock exchanges such as the New York or American exchanges. However, there are privately traded MLPs. Most MLPs focus on pipelines but they also invest in refining, processing or exploration. As such, there is a correlation between the prices of the commodities involved and the performance of the MLP. MLPs focusing on pipelines, storage or transportation are known as "Midstream" and are extremely popular amongst financial advisors and brokers. They tend to pay nice commissions and can be an easy sale for an unscrupulous advisor who chooses to misrepresent the products as a fixed income alternative.
Pipeline MLPs were a big hit and they turned out to be the most pitched version of an MLP. Firms such as Energy Transfer (NYSE:ET), Kinder Morgan (KMI), and Enterprise Products Partners (EPD) did well.
Between 2009-2014, MLPs as a whole performed remarkably and upper management at these entities made a lot of money. Investors did well too but many were unknowingly taking on more risk then they appreciated. This is especially true of privately traded MLPs which are generally unsuitable for most investors.
Financial advisors pitched Midstream MLPs as win/wins for the client and used terms such as "Energy Toll Roads". The popular pitch was that these MLPs did not have their assets tied up in the expenses and risks of their downstream or upstream counter-parts. Moreover, consumers were assured there was no price correlation. All the investors had to do was sit back and wait for these entities to collect their tolls. Often, these same financial advisors neglected to explain the convoluted tax structures of these investments to unwitting clients. It did not matter, the distributions were good and there was a false sense of safety. Beginning in 2009 shares or Units of MLPs increased in value and distribution outpaced anemic interest rates. Sophisticated investors and knowledgeable financial advisors questioned the returns. They understood there was always going to be a risk/reward ratio. However, many investors did not appreciate the maxim of high reward equaling high risk. The financial advisors and stockbrokers pushing these products either did not understand the inherent risks of MLPs or did not care.
Those that steered their clients clear of these products are glad, as are the clients themselves. Over the last 5 years, these products have been devasted. By the end of March 2020, the Alerian MLP Index was down over 70% from its high point in 2015. The decline started in 2014. However, after the squabble between Russia and Saudi Arabia in early March of 2020, Oil and any byproduct or company associated with energy took a nose-dive. This included stocks related to the energy sector and of course energy MLPs. Regardless of what the financial advisor said. When there is trouble in the underlying commodity or sector, there will be a sell-off in the market.
Pundits will say the basic issue with the energy sector as a whole is the fact that that the market is oversaturated. There is just too much supply and that has been an issue for a few years. Storage levels are way up to the point there is not enough storage space. When that is combined with the price declines, it negatively impacts strategies and business models utilized by management at the various MLPs. To make matters worse, many of the companies using the MLP toll roads are themselves in financial trouble. At the very least, future expansion by these entities will be curtailed until prices dramatically increase. The picture gets worse when the debt/capital ratios of the MLP entities and their partners are analyzed. Lastly, public perception is often negative of pipelines, especially those that run through protected wetlands and Native American lands.
In short, a knowledgeable financial advisor or stockbroker would have seriously questioned MLP investments as an alternative to fixed income investing and would not have considered them at all for conservative or short-term investors. Even for moderate or aggressive investors, MLP investments, if recommended at all, should have been limited to very small percentages of the portfolio. Of course, high commissions can often cloud a seasoned advisor's judgment. However, most financial advisors or stockbrokers simply did not understand the product and failed to do basic due diligence. Such actions leave weary investors holding the bag.
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