With the tremendous sell off in MLPs over the last 18 months, one would expect that many of them would have cut their distribution payouts. In that case, fundamental performance would be more aligned with stock performance. However, the opposite is actually true. A little under half of midstream MLPs have announced increased distributions. One midstream MLP suspended its distribution, while another cut theirs by 25%. Meanwhile, a little over 50% of MLPs have kept distributions even with the previous quarter’s. Both of those MLPs had poor financial metrics. The ability of an MLP to maintain or increase its distribution is dependent on its debt level and its coverage ratio.
The coverage ratio is the amount of cash which could be distributed divided by what actually is distributed. The debt is usually measured by debt to EBITDA – the lower the better. In today’s environment, when MLP unit prices are at multi-year lows, the prospect of selling units to finance growth is generally unacceptable. MLP unit prices have followed the price of oil and many MLPs are priced irrationally. We are focused on discovering and investing in MLPs that are undervalued and will continue to pay strong and growing tax deferred distributions for the long run.