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PAA’s Potential Distribution Cut: Are MLPs Recovering?

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Part 2
PAA’s Potential Distribution Cut: Are MLPs Recovering? PART 2 OF 3

Understanding MLP Distributions: The ‘New Normal’

PAA’s distribution cut

With Plains All American Pipeline’s (PAA) potential distribution cut announcement, it has become apparent that incorporating an eventual industry recovery into the company’s plans may prove aggressive.

As PAA has noted, its margin-based Supply and Logistics segment’s earnings were hit by increased competition and the industry down cycle. While the decision to base future distributions only on fee-based income is a prudent one, the associated cut has still concerned investors.

Understanding MLP Distributions: The &#8216;New Normal&#8217;

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MLPs (master limited partnerships), as represented by the Alerian MLP Index, have fallen 10% YTD (year-to-date). MLPs fell ~3% on August 8, 2017, after Plains All American—a top MLP by market capitalization—announced that it is working on a distribution reset, given the unpredictability of its Supply and Logistics segment’s earnings.

Notably, broader markets (SPY) have risen 9% YTD, while the Alerian MLP ETF (AMLP) has fallen nearly 11%.

In today’s “lower-for-longer” oil price environment, it has become imperative for companies to operate successfully in the “new normal” crude oil prices of around $50 per barrel. Companies that can do this will likely be the preferred choice of investors.

For an overview of MLPs’ 2Q17 performance, check out Market Realist’s How Mid-Cap and Large-Cap MLPs Performed in 2Q17.

Plains All American Pipeline has received a number of rating downgrades and price target cuts after its lowered guidance and potential distribution cut announcement. We’ll discuss this more in the next and final part of this series.

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