Alerian MLP: limited options

US output of fossil fuel is at an all-time high. That should be good news for the US energy industry's master limited partnerships, which are widely thought of as haulers and storers of energy, and supposedly indifferent to the direction of commodity prices. Yet MLPs have suffered. The Alerian MLP Index is down a fifth since September.

MLPs are no longer just collecting tolls. Some are drilling, gathering and processing oil and gas, businesses fully exposed to falling prices. The most exotic MLPs mine fracking sand or make nitrogen fertiliser, both hard-to-hedge commodities.

What defines an MLP is not what they do, but rather the US tax code. MLPs are exempt from paying taxes at the company level if they earn most of their income from energy and minerals, but they must then pay out most of their cash flow to investors.

MLPs have enjoyed high valuations in a yield-hungry world. MLP investors want more than just a dividend, though; they want the payout to grow over time. Happily, expensive shares can be used to make acquisitions that, in turn, boost the dividend.

But with the collapse in energy prices, this happy cycle becomes harder to maintain. Yields on the Alerian MLP index have held steady, but that reflects declines in the index level and not robust distributions growth. Last week Breitburn Energy Partners, an oil-producing MLP, slashed its payout for the second time in 2015 and announced a $1bn infusion from a private equity group.

Pure infrastructure MLPs may not be a haven, either. Plains All American Pipeline, one of the biggest, warns it will take a hit if oil's forward price curve flattens, reducing spot demand for crude and for storage tanks (for now the curve is steep, and Plains's tanks in Cushing, Oklahoma - the delivery point for US oil futures - are still very much in demand).

As one fund manager has put it, MLPs are a financing structure, not an industry. Know what you are buying.

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