A bankruptcy decision put the brakes on private equity firms' accelerating interest in the troubled master limited partnership sector. Now only short sellers and a few hearty energy and real asset investors are interested.
Master limited partnerships are public companies that mainly build and own oil and gas pipelines. Investors like MLPs because they are more liquid than private energy investments, they produce income and they have long-term contracts from oil and gas producers for use of their pipelines.
Private equity executives have considered MLPs an investment opportunity because of the mismatch between MLPs' dwindling stock prices and the value of the assets they own. In January, EnCap Investments LP, EnCap Flatrock Midstream, The Energy Minerals Group, Kayne Anderson Capital Advisors LP and First Reserve Advisors LLC together bought Plains All American Pipeline LP, an MLP, for $1.5 billion.
The total MLP market was about $481 billion as of Dec. 31, according to the Capital Innovations Institute, the research arm of Pewaukee, Wis.-based real asset manager Capital Innovations LLC. Most — about 82% — of MLPs are in the energy and natural resources businesses, primarily pipelines. Some 44.2% of outstanding MLP units are owned by institutional investors, according to Capital Innovations Institute, Thomson Reuters and Credit Suisse.
Large institutional investors have about $3 billion in MLP investments, according to Pensions & Investments' Research Center.
The significant drop in stock price “seemed overdone compared to the quality of the businesses,” explained Brian Murphy, managing director at Darien, Conn.-based alternative investment consultant and fund-of-funds manager Portfolio Advisors LLC.
“The dislocation in the MLP space may unlock additional opportunity,” said Jamie Weinstein, a member and co-head of KKR & Co.'s special situations unit in New York. “The opportunity is that when the capital structures break down, those assets will reprice to levels that are a lot more attractive.”
But, a bankruptcy court decision stunned the industry, slashing the key feature that was thought would shield MLPs from the ups and downs of the oil and gas market.
In March, U.S. Bankruptcy Judge Shelley Chapman in New York ruled that Sabine Oil & Gas Corp. could reject contracts to transport oil and natural gas. While the ruling only applies to this case, it could nevertheless serve as a road map for other courts to follow. If other courts reach the same conclusion, this means that oil and gas producers would no longer be stuck with pipeline contracts and could break or change the terms.