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Corporate structure is the talk of MLP industry as consolidations mount

At the Master Limited Partnership Association's annual meeting, the fate of the master limited partnership itself was on the agenda.

Equity analysts and investment managers in attendance sensed optimism owing to higher oil prices and lower debt loads but cited corporate governance and simplification as a major topic weighing on participants at the Orlando conference, given the recent wave of energy company consolidations wiping out energy pipeline MLPs in the wake of federal tax changes.

"Corporate structure was discussed in nearly all of our meetings," Mizuho Securities USA LLC Managing Director Brian Zarahn said in a May 25 note to clients. "Management teams were asked about [incentive distribution rights] buy-ins and C-corp variations."

A lot has changed since the association's 2017 conference, which followed large-scale M&A deals that pared down the sector following a commodity price downturn. Industry observers a year ago were not overly concerned by weakened stock prices and expected recovering oil prices to spur an upswing. In the year since, however, the bellwether Alerian MLP Index lost more than 12% even as West Texas Intermediate crude oil prices gained nearly 50%.

That underperformance, also despite improving financial results in the sector, has fatigued investors, MUFG Securities Inc.'s Barrett Blaschke said. "It doesn't feel like the space is falling straight through the floor anymore ... though I think people are tired," he said in an interview. "Everybody's sort of beaten down a little bit."

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Still, Master Limited Partnership Association Executive Director Lori Ziebart said that sentiment was "generally positive" and noted higher attendance. Analysts at energy investment bank Tudor Pickering Holt & Co. agreed and said in a May 25 note to clients that 2018's conversations had a more "positive slant overall" and did not focus as much on debt obligations and impending distribution cuts.

The MLPA, meanwhile, rebranded the conference to include midstream corporations as the MLP sector narrows, but multiple participants noted that heavyweights Kinder Morgan Inc., Williams Cos. Inc. and ONEOK Inc. did not show up to the expanded gathering.

CBRE Clarion Securities analyst Hinds Howard said in a May 27 blog post that "there were many last-minute cancellations due to corporate actions taken in recent weeks." They included Williams Partners LP, Spectra Energy Partners LP and Enbridge Energy Partners LP, which are set to roll up into their parent companies, as well as Boardwalk Pipeline Partners LP and TC PipeLines LP, which are in limbo amid struggling stock prices.

Boardwalk will either convert to a C-corp or face a buyout by sponsor Loews Corp. after the Federal Energy Regulatory Commission extinguished pipeline MLPs' income tax allowance recovery provision on cost-of-service rates, while TC PipeLines slashed distributions 35% in anticipation of substantial revenue losses from exposure to those rates.

Not all MLPs welcomed questions about future simplification deals. When Plains All American Pipeline LP management was asked about a possible combination with its general partner, both Howard and SL Advisors LLC Managing Partner Simon Lack said the executives were not particularly forthcoming.

"They feigned surprise at the question ... and suggested to one investor that perhaps he didn't fully understand their structure," Lack wrote in a May 27 blog post.

Two of the biggest midstream energy MLPs, Enterprise Products Partners LP and Magellan Midstream Partners LP, reassured participants that they do not intend to become corporations. Both partnerships are pivoting toward self-funding their equity needs to avoid high-cost public markets, and they do not have incentive distribution rights obligations to their general partners that can deplete the pool of available capital for reinvesting in the business.

The federal corporate tax rate reduction to 21% from 35%, which contributed to a narrowing of MLPs' tax advantage over corporations, is not necessarily permanent, Enterprise said.

"They ... pointed out that the 21% corporate tax rate has been around for a short time and may not last given a change in future administrations, if tax rates were to rise in the future the benefit of the MLP structure would increase," analysts at Stifel Nicolaus & Co. Inc. said in a May 28 note to clients.