Three master limited partnerships (MLPs) with double-digit yields -- Magellan Midstream Partners (MMP -0.34%), Plains All American Pipeline (PAA -0.25%), and MPLX (MPLX 0.44%) -- suffered double-digit price declines in September, according to data provided by S&P Global Market Intelligence.
The companies' unit prices (the MLP version of share prices) lost out to the S&P 500, which only slipped 3.9% for the month. Meanwhile, Magellan's unit price fell by 10%, MPLX's was down 13.8%, and Plains' dropped 15.5%. The year-to-date picture is even worse, with MPLX's shares down more than 35% so far in 2020, while Magellan's have fallen 44% and Plains' a jaw-dropping 68.5% this year.
The three companies operate North American pipeline and storage-terminal networks for crude oil and other products. But within that universe, the companies are differentiated by what they transport and where it goes.
Magellan primarily deals with refined products through its extensive Midwestern pipeline network, plus a series of refined-product storage terminals in the Southeast. It also has a few long-haul crude pipelines in Texas, Oklahoma, and Kansas.
Plains All American, on the other hand, primarily operates crude oil pipelines and terminals. Its network is centralized in Texas, but its long-haul crude pipelines stretch all the way to the Province of Alberta in Canada.
MPLX transports crude oil and refined products through its pipelines, but also has natural-gas gathering systems and fractionation capabilities (basically, the natural gas equivalent of crude oil refining).
But when the entire industry is experiencing a downturn, exactly what oil and gas products a company's network is transporting and storing doesn't matter quite so much: Things are going to be bad. And in September, the downturn that has gripped the global oil and gas industry since March continued.
The pipelines operated by Magellan, Plains, and MPLX primarily generate fee-based income through a tollbooth model. That is, they charge other companies volume-based fees to transport products through their pipelines and to store it in their terminals. The more product a company ships, the more they pay.
What's good about this arrangement is that it largely insulates pipeline companies from fluctuations in oil and gas prices. Whether oil's cheap or expensive, it still has to be shipped. And as long as the country was experiencing an oil and gas boom, with companies clamoring for more pipeline capacity, everything was coming up roses for midstream MLPs.
But with the coronavirus pandemic, fuel demand has dropped, and many oil and gas producers have shut-in production, especially in the formerly red-hot Permian Basin. A year ago, pipeline companies literally couldn't construct pipes from the Permian to the Gulf Coast fast enough. Now, they're offering discounts and other incentives to try to hang on to what little volume is left.
News during the month of September that Saudi Arabia was offering discounts to its Asian customers, and that Libya would be ramping up crude oil production, made it clear that global oversupply wasn't likely to go away anytime soon. And that global oversupply seems likely to result in plenty of unused capacity in U.S. pipelines as producers keep their expensive shale-production operations on ice.
Even though the situation seems unlikely to reverse itself anytime soon, investors may be tempted by the companies' yields. MLPs are required to pay out most of their cash flow as distributions to unitholders, and the bludgeoning their unit prices have taken has resulted in double-digit yields. Magellan is currently yielding 12%, and Plains about 12.5%, while MPLX's yield has soared to 17.4%!
Of course, yields can change if distributions get cut; Plains, for example, has already cut its distribution three times in the last five years. Magellan has a solid balance sheet and expects its cash flows to easily cover its yield. And while MPLX has much more debt, its management is still expressing confidence in its ability to cover its dividend.
The prospect of such a high yield may be enticing to dividend investors, but they should understand the risks. Magellan's payout, at least, looks reasonably solid, with MPLX's slightly less so, and Plains' the least secure of the lot.