American Midstream Partners LP's 75% distribution cut and the brutal stock market reaction shine a spotlight on investors' frustration with the master limited partnership model to finance energy pipelines.
American Midstream on July 27 announced a second-quarter distribution of 10.31 cents per common unit, down from 41.25 cents in the previous quarter, making it the latest MLP to turn away from hefty payouts to investors in favor of keeping more cash on hand to fund operations.
Compared to larger MLPs such as Enterprise Products Partners LP and MPLX LP that unveiled plans to limit distribution growth, American Midstream faced a more dire cash retention situation. "Over the last 12 months, spending on CapEx and dividends was extremely high relative to cash from operations, a lot more so than the midstream names I cover," said Stewart Glickman, an energy equity analyst at investment research firm CFRA.
A market bloodbath after the distribution announcement — the stock was down 24% at the opening bell July 27 and down 41% in early afternoon trading — raises questions about how far ArcLight Capital Partners LLC, the private equity firm that owns nearly 80% of the MLP's general partner, might go to keep it afloat.
"I guess the market is responding with surprise that ArcLight isn't continuing to prop up the distribution further," said CBRE Clarion Securities analyst Hinds Howard, who specializes in MLPs. "It's ... emblematic of the struggle that smaller MLPs will have in the new midstream world." The July 27 tumble knocked the partnership's market capitalization below $400 million.
American Midstream has retained the MLP structure at a time when recent federal tax changes for partnerships, combined with high leverage and sky-high equity costs, are accelerating a trend away from the model that started in late 2014. The bellwether Alerian MLP Index could lose about a dozen midstream MLPs in 2018, and its value dropped by roughly half from a fall 2014 peak to the start of 2018.
"Once again, the investor looking to the MLP structure for stable, tax-deferred income has been burned," said Henry Hoffman, a partner at energy-focused investment firm SL Advisors LLC.
American Midstream expects the distribution cut to free up an additional $65 million of capital per year that can be used to pay down debt and be put toward growth projects and plans to sell approximately $350 million to $400 million of noncore assets in addition to exiting its $210 million marine terminals business and a proposal to offload its $138.5 million refined products terminals segment.
The asset sales will help with efforts to improve credit ratings, according to the partnership.