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Master limited partnership (MLP) distributions are fundamental to the valuation of MLPs because many people buy MLPs specifically for their cash flow. All else equal, MLPs which cut distributions can expect to see the value of their equity fall and MLPs which raise distributions can expect to see the value of their equity rise. It is for this reason which investors monitor the announced distributions of MLPs. For distributions announced so far in 2013 in the MLP midstream energy space, quarter-over-quarter growth appears to be positive.
Market Realist looked at the quarter-over-quarter increase in distributions of 45 midstream energy MLP companies and found that distributions grew on average 2.1% this quarter versus 1.7% last quarter for this set of companies. Excluded were companies that had not yet announced a distribution in 2013, companies with limited distribution history (i.e. companies that recently IPO’d), and companies outside the midstream space such as refiners, E&Ps, and shipping companies. Additionally, because some of the companies in the set are very small and may have limited liquidity and ownership, we also looked at subsets that excluded smaller names. For example, looking at a subset of names with only $2 billion and over in enterprise value, the average growth in distributions this quarter was 2.1% compared to 1.6% for the prior quarter. Lastly, just looking at the major MLPs (those with enterprise value of $20 billion or greater), the distribution growth trend still held true, with distributions last quarter increasing an average of 2.0% compared to 1.7%. The above graph summarizes the aforementioned data.
Note: The period denoted represents the period in which the distribution was announced. However, some companies may announce a distribution during 1Q13 and call it their 4Q12 distribution as cash distributed during 1Q13 is cash that was generated during 4Q12.
An increase in the percentage change in distributions quarter-over-quarter is a positive indicator. This means that companies are growing their distributable cash flow at faster rates, thereby growing distributions. All else equal, a growing distribution results in a higher stock price.
Therefore, investors owning MLPs such as Enterprise Products Partners (EPD), Kinder Morgan Energy (KMP), Energy Transfer Partners (ETP), or Williams Partners (WPZ) may want to monitor quarter-to-quarter distributions. Additionally, many MLPs are part of the Alerian MLP ETF (AMLP), an ETF which tracks a capitalization weighted index of 50 energy MLPs.
© 2013 Market Realist, Inc.