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Next election could inspire big partnerships to abandon MLP status, analyst says


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Next election could inspire big partnerships to abandon MLP status, analyst says

If Energy Transfer LP and Enterprise Products Partners LP converted from partnerships to C-corps, they could potentially join the S&P 500 and become some of the top yielding names on the index.

Those yields could attract more general investors that have steered away from partnerships because of their more complex tax status, but the companies may want to wait until after the 2020 elections to decide whether to change their corporate structures, Sanford C. Bernstein's midstream analyst told her clients May 24.

The current 8% and 6% yields of Energy Transfer and Enterprise Products would put both in the top 10 of the S&P 500's dividend payers, Bernstein's Jean Ann Salisbury said in a note. The move would potentially attract new attention from general investors, many of which have never heard of the companies because their status as master limited partnerships, or MLPs, keeps them off most stock indexes.

Energy Transfer, for instance, would be the second biggest dividend payer behind telecom CenturyLink Inc., and it has some advantages over CenturyLink, Bernstein said. "Our understanding of #1 CenturyLink is that it is focused primarily on … landlines," Bernstein said. "With only that information, we will assert that ET's dividend is safer."

Bernstein said the two "mega" MLPs had enough earnings to keep paying dividends at current rates even if they lost the MLP tax advantage by becoming a corporation. MLP taxes are paid by individual unitholders, not the partnership, allowing more cash to be available for distribution to owners, but that tax advantage has been whittled away in recent years by cuts in corporate taxes under the Trump administration.

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Taxes are a big driver in a company's decision on whether to convert to a C-corp structure, but politics must also be considered. With the chance that President Donald Trump will be defeated by a Democrat in 2020, his corporate tax cuts may not survive that election, sweetening the value of MLPs' tax advantages.

"If a moderate Democrat or Trump wins in 2020, we could see several quick MLP conversions after one converts," Bernstein said.

The quick conversions would expose general investors to unfamiliar companies with tasty dividend yields, Bernstein said. "Believe us, there are a number of investors who have never heard of $60B [Enterprise Products] when we mention it," the investment manager said.

The election of a "far left" Democrat and an increase in corporate tax rates, by contrast, would reinforce the MLP advantage, keeping Energy Transfer's and Enterprise Products intact as MLPs, Bernstein said. Either way the political wind blows, Bernstein recommends the big midstream MLPs. "We would be buyers of both mega-MLPs, and believe that their structural undervaluation can't last forever," Bernstein said.

A further argument for C-corp conversion is that the Alerian MLP Index, the major index for midstream MLPs, is becoming overweighted, with a few stocks driving the index's performance, Bernstein said. "With [Buckeye Partners LP] bought by private equity and [MPLX LP] and Andeavor Logistics LP] combining, we now have seven large companies at or near the 10% [weighting] cap, and then many tiny MLPs with nowhere near the heft or security of the larger ones that should not be comp[ar]ed to them," it said.

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