But a recovery in crude-oil prices necessarily implies a decline in US onshore production, exposing MLPs with fee-based contracts to declining throughput, which would reduce the cash flow generated by these assets. After all, toll roads need a steadily growing stream of traffic to support a growing distribution.
Thus far, names that operate crude-by-rail facilities involved in transporting crude oil from the Bakken Shale to refiners on the East Coast have suffered the most pain, with volumes taking a hit from the compression in price differentials and higher costs from stricter safety regulations on railcars.
These headwinds forced Global Partners LP (NYSE: GLP) to slash its distribution by 33 percent. NGL Energy Partners LP (NYSE: NGL) faces similar headwinds and a credit-rating downgrade, but has maintained its distribution thus far, thanks in part to the sale of its general-partner interest in Transmontaigne Partners LP (NYSE: TLP) to ArcLight Capital Partners for $350 million. Global Partners’ decision to slash its distribution after hiking its payout in the third quarter suggests that conditions in the crude-by-rail market have deteriorated considerably.
Enable Midstream Partners LP (NYSE: ENBL) hasn’t cut its distribution, but the stock has struggled mightily despite its growth prospects in the SCOOP. The partnership’s woes underscore the headwinds faced by midstream operators that own gathering pipelines serving marginal acreage.
Minimum volume commitments on its legacy Ark-La-TX and Arkoma gathering systems protect the partnership’s cash flow from the steady decline in throughput volumes, but the market remains concerned about what will happen when these agreements expire or are renegotiated. Enable Midstream Partners’ midstream infrastructure in the Granite Wash and Mississippi Lime also entails significant volumetric risk, while expiring hedges on the price of natural gas liquids won’t help matters.
CenterPoint Energy (NYSE: CNP) disclosed plans to pursue strategic alternatives for its general-partner and equity interests in Enable Midstream Partners, though Equity Capital Partners’ failed effort to find a buyer for its general-partner interest in Summit Midstream Partners LP (NYSE: SMLP) suggests that the utility faces an uphill battle.
Enable Midstream Partners and Summit Midstream Partners’ struggles underscore the market’s understanding that minimum volume commitments eventually expire, exposing operators to long-term volumetric risk.