Master limited partnerships (MLPs) have been slowly disappearing. This past year saw a couple more vanish from the public landscape, with ONEOK Partners among the largest after its parent ONEOK (OKE 1.14%) bought all the units it didn't own in a $17.2 billion deal. Before that, Targa Resources (TRGP 0.49%) bought out its MLP and Kinder Morgan (KMI 0.87%) acquired all three of its public entities.
Several factors played a roll in these roll-ups, though the main one was a desire to cut costs -- namely, the expensive incentive distribution rights (IDRs) that MLPs pay their parent. In fact, most MLPs that didn't complete a roll-up transaction with their parents have cut deals to rid themselves of those fees. That said, there are a few stragglers out there still paying these high costs to their parents, with three appearing likely to go the buyout route to get them eliminated.
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The quick way to get more breathing room
The weak energy market over the past few years has made things tight for EnLink Midstream Partners (NYSE: ENLK). Cash flow has slipped a bit over the past year due to weaker volumes flowing through some of its legacy systems. As a result, the company can barely cover its distribution to investors. In fact, though the third quarter, it had generated $457.4 million in distributable cash flow and sent $455.5 million of that to investors. While the company has several growth projects underway that should grow cash flow and boost coverage, it will be quite some time before the MLP will be in the position to increase its payout.
Aside from weak energy prices, another reason for the tight coverage is that the company sends a portion of its cash flow to its parent EnLink Midstream (ENLC +0.00%) via IDRs, with those fees totaling $44.1 million so far this year, up from $42.4 million a year ago. While EnLink Midstream Partners has a range of options to eliminate those fees, it would make the most sense for EnLink Midstream to acquire EnLink Midstream Partners. For starters, EnLink Midstream is majority-owned by shale giant Devon Energy (DVN 2.01%), making that the logical entity to consolidate. Add to that the fact that EnLink Midstream has a stronger coverage ratio and already partially owns EnLink Midstream Partners' Oklahoma natural gas processing businesses, and this direction seems most likely if they choose to make a move.
How much longer can it hold out?
Energy Transfer Partners (ETP +0.00%) has also been hampered by costly IDRs even though its parent Energy Transfer Equity (ETE 1.44%) has been providing support by giving up a portion of what it's owed. Worse yet, that support will start going away next year, which will cause distribution coverage to tighten up. Analysts have been calling on the company to address the situation by completing a transaction that would eliminate those IDRs, with an acquisition of Energy Transfer Partners by Energy Transfer Equity making the most sense if for no other reason than its CEO owns a massive stake in the latter.
That said, management has been resistant to these calls, saying that they have no plans to consider an alternative corporate structure until late 2019 at the earliest. However, the company has a history of rolling up its MLPs, with Energy Transfer Partners merging with sibling Sunoco Logistics last year and combining with sister company Regency Energy Partners in 2015. That history suggests the company might act sooner than it's letting on, especially if more MLPs disappear this year and its valuation remains insanely cheap compared to peers.
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The writing is on the wall
Rice Midstream Partners' (NYSE: RMP) days appear to be running out. The company's former parent recently merged with natural gas giant EQT Corp (EQT 0.88%), which has its own MLP EQT Midstream (EQM +0.00%). EQT said that it would drop down the midstream assets it acquired in that deal to its MLP instead of Rice Midstream Partners, which makes its future unclear.
EQT Corp is currently evaluating its midstream options. That said, it makes the most sense to combine its MLPs into one entity and eliminate the IDRs. Doing so would create one larger midstream company that would have lower costs, making it a stronger option for investors.
It's better in the end if things go this way
MLPs aren't as popular as they once were. That's leading energy companies to change strategy, with many either consolidating their various MLPs or eliminating the structure. That trend looks like it will continue in 2018, since several more need to do something to address their issues. However, because these consolidation transactions are creating stronger companies, this change will be good for investors in the long run.
