23 Mar

A Look at the Near-Term Risk Factors for MLPs

WRITTEN BY Kurt Gallon

US steel tariffs

The new 25.0% tariff on the import of steel negatively impacted MLPs, particularly midstream MLPs, which import ~50.0% of steel required in the manufacturing of pipelines. MLPs are hoping to persuade the Trump administration to remove the tariff, as only 3.0% of steel manufacturers produce pipeline-grade steel.

A Look at the Near-Term Risk Factors for MLPs

However, the US steel tariffs are expected to have a low impact on MLPs’ capital spending in the near term. Here’s how:

  • Most MLPs have already imported pipes required for 2018 and most of 2019.
  • The growth capex of MLPs is expected to come down from 2020, resulting in reduced burden from new tariffs.
  • A significant portion of pipeline-grade steel comes from Canada and Mexico. These two countries are exempted from the US tariff until there is a renegotiation of NAFTA (North American Free Trade Agreement).
  • About 55.0% of US pipelines are composed of steel while the remaining ~44.0% are primarily composed of non-steel materials such as copper, plastics, and iron.
  • Moreover, pipeline operators are expected to transfer the increase in pipeline costs to its customers through an increase in tariffs.

Regulatory hurdles

Regulatory hurdles, which used to be MLPs’ biggest risk factors, seemed to be a thing of past under the new administration. However, they seemed to be creeping again with recent blockages on Energy Transfer Partners’ (ETP) Bayou Bridge Pipeline and Rover Pipeline projects.

FERC revised ruling

The revised FERC tax ruling was seen as a big negative factor for midstream MLPs. While players such as Enbridge Energy Partners (EEP) have acknowledged the possible impact of a revised ruling, many have issued a statement that they don’t see any material impact. This is due to negotiated contracts with customers and lower-than-maximum tariffs charged from customers.

Rise in Treasury yields

The rise in US Treasury yields could drive the cost of debt higher for some MLPs. However, a portion of these cost increases could be shifted to higher pipeline tariffs. In the final article in this series, we’ll look into MLPs’ outlook for 2018 and the analysts’ favorite MLPs.

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