The Disappearing MLP Buyer

The smaller MLPs are especially short of natural buyers. Years ago when the MLP industry had its own conference, StonMor (STON) was an incongruous participant as an MLP in the “deathcare” business (funeral homes and cemeteries). They had a complex structure even for an MLP, and they were out of place among energy investors. They’re now a corporation, and following various self-inflicted problems in 2016 are trading at roughly 5% of their value from years back. They didn’t fit in anybody’s portfolio.

MLPs unable to interest institutions will similarly struggle to attract natural buyers.

Investors in MLP-dedicated strategies should ask themselves: who are the likely buyers of what they own? For now, everything is so cheap that they could easily bounce. But over the longer run, we think MLP-dedicated funds will wish to diversify, which could mean selling most of their MLPs and buying pipeline corporations. A conversion of one of the big three would probably force the issue.

This will hurt performance, and nobody wants to be invested in the last fund to make that shift. Diversified exposure to midstream energy infrastructure through corporations, with just a handful of big MLPs, offers plenty of upside once we get past the coronavirus. But CEF investors saw their MLP allocations reduced in a fire sale, thanks to incompetent portfolio management. Having incinerated most of their investors’ capital, MLP CEFs won’t be a source of demand going forward. High net worth investors have been abandoning MLPs for years. ESG funds buy the biggest pipeline corporations (see our video ESG Investors Like Pipelines) but not MLPs because of their weak governance.

Open-ended ETFs and mutual funds that are loaded up with MLPs are likely to diversify. So if a portfolio of MLPs no longer makes sense, their only place is as part of a bigger portfolio. And if an investor owns just a few MLPs, she’s likely to focus on the big ones. A portfolio of MLPs has an uncertain future.

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 SL Advisors manages investment products designed to incorporate the advantages described above.

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