A series of multibillion-dollar moves has shown that master limited partnerships are no longer the dominant way to finance energy pipeline infrastructure in the U.S. and could offer clues to the corporate models that will replace them.
Many U.S. and Canadian oil and gas pipeline assets are housed in publicly traded MLPs that have offered tax advantages to investors and paid relatively high quarterly distributions. But a combination of inaccessible public equity markets, over-leveraged balance sheets, and recent changes to federal tax policy have spurred companies like Williams Cos. Inc. and Enbridge Inc. to roll up their partnerships.
The MLP rise and fall is a pattern that Apache Corp. will avoid by electing a full-fledged C-corporation structure for Altus Midstream LP, a new joint venture with Kayne Anderson Acquisition Corp. to house the independent driller's play gathering, processing and transportation infrastructure in the Alpine High shale play.
According to CBRE Clarion Securities analyst Hinds Howard, who specializes in MLPs, Apache's choice indicated that "being an MLP doesn't really factor into the equation anymore" when it comes to successfully going public.
Kevin McCarthy, chairman of the board at Kayne Anderson Acquisition Corp., a company that facilitates corporate mergers and reorganizations and is a partner in the Apache deal, agreed that the C-corp structure would be more attractive. "I can assure you, as an MLP investor, MLPs are no longer getting a premium valuation compared to C-corps," he said during an Aug. 8 call detailing the agreement. "There's been a lot of C-corp conversions in the space. And we think for this type of asset, the market will place a premium on something that's a C-corp rather than something that's paying out all this cash flow and having to come to the market to fund growth."
Not all investors and analysts are as excited about Altus Midstream's ownership structure. Analysts at Mizuho Securities USA LLC warned in an Aug. 9 note to clients that Apache's initial 71% stake in the new company could spell trouble for the driller because it will consolidate Altus results in its financial statements.
"This adds an additional layer of accounting complexity to [Apache] ... which investors (and sell-side analysts for that matter) may not be thrilled about," they said. "[Apache] is essentially diving into the same structure that [Devon Energy Corp.] has recently moved away from with its divestiture of [EnLink Midstream Partners LP] ownership."
Devon expected the July sale to cut its consolidated debt by 40%, which according to some analysts indicated that parent drilling companies are willing to sell their MLPs at a discount to reduce their own leverage.
A newcomer along with Altus, Rattler Midstream Partners LP will take on a different structure once its initial public offering of $100 million of common units is complete, according to an Aug. 7 SEC filing. The midstream arm of Permian Basin-focused producer Diamondback Energy Inc. will trade as an MLP, but it will pay corporate taxes instead of passing that burden onto shareholders like fellow Diamondback subsidiary Viper Energy Partners LP, which relinquished its pass-through status in March.
Howard said Rattler's hybrid model is a good one because it exposes the partnership to a broader pool of investors.
"They get the best of both worlds," he said in an interview. "You are still eligible to be included in the Alerian indexes … you get exposure to those investors and that flow from the [exchange-traded fund] side of things, and you also get exposure to institutional investors and foreign investors who can't own flow-through entities or would prefer not to."
But even though both Altus and Rattler are explicitly shunning the traditional MLP model, the occasional pass-through partnership may still pop up under special circumstances.
"If somebody came with an energy infrastructure asset that didn't require a lot of growth capital and therefore could afford to pay out much of the cash flow generated, it might still be attracted to MLP investors," energy-focused investment firm SL Advisors LLC Managing Partner Simon Lack said in an interview.
One MLP feature that has likely been eliminated for the long term is general partners' incentive distribution rights, or IDRs, that handicap limited partners' access to capital for reinvesting in the business. Those payments can total 50% of a partnership's incremental quarterly cash distributions and take a heavy toll on share prices.
Energy Transfer Equity LP recently became the latest general partner to give up its IDRs when it announced a merger with Energy Transfer Partners LP ending its status as the last holdout among large-scale midstream operators.
"I do think we're done with IDRs at IPO," Howard said. "I think [bankers have] gotten the message that IDRs are no longer palatable."