Master Limited Partnerships Have Been the Source of Significant Losses for Investors

By February 1, 2016 September 20th, 2017 News

In the low interest rate environment of the past several years, master limited partnerships (MLPs) became quite popular and were promoted by brokers as investments that would earn a strong yield-based return while retaining the potential for capital appreciation.  MLP IPOs raised more than $100 billion since the global financial crisis.  Recently, however, the current values of many MLPs have plummeted (many by more than 50%) and the high yields have come to an end as falling energy prices and doubt about the future of the industry have caused the partnerships to suspend or decrease their dividends.  This has caught many investors—particularly those who replaced their relatively safe fixed-income investments with MLPs—by surprise as brokers tended to promote the supposed benefits of MLPs (including by referencing the high returns of the past) without adequate disclosure of the substantial risks associated with MLPs (such as their stock-like characteristics and high concentration in the energy industry).

What is a Master Limited Partnership?

A master limited partnership, which is sometimes referred to as a publicly traded partnership, is a limited partnership that is publicly traded on an exchange.  It seeks to combine the tax benefits of a limited partnership with the liquidity of a publicly traded security.  As a partnership, MLPs do not pay entity-level income taxes and instead pass all income, gains, deductions, losses, and credits through to investors.  Because they are publicly traded on an exchange, MLPs are available to any investor with a brokerage account and can be bought and sold throughout the trading day.

Today, MLPs are primarily concentrated in the energy sector.  MLPs first came about in the early 1980s (Apache Corporation became the first company to structure as an MLP in 1981).  At the time, there were no real restrictions on the types of businesses that could operate as MLPs.  As a result, companies all over the spectrum began to form as MLPs.  To prevent the loss of tax revenues, Congress passed legislation designed to restrict the types of companies that could form MLPs.  Now, to qualify as an MLP under the Internal Revenue Code, a partnership must generate at least 90 percent of its income from “qualifying” sources.  These “qualifying” sources generally include income related to the energy industry, such as those related to the exploration, production, processing, and transportation of oil, natural gas, and coal.

Unlike a real estate investment trust (REIT), MLPs do not have a statutory requirement to distribute a certain amount of its income to investors.  Because MLPs are typically valued based on a multiple of their cash flow, they tend to distribute all available cash (cash over and above that required for operations and debt service) to investors.  This, combined with absence of corporate taxes, has historically created the high-yield for investors.

MLPs generally have two categories of ownership:  the general partner and the limited partners.  The general partner’s ownership interest is typically held by a holding company owned by a major energy company.  The limited partners’ ownership interest is held by the investors and traded on an exchange. The general partner, although it generally owns a very small portion of the MLP compared to the combined value of the limited partners, controls and manages the MLP.

 

Investing in MLPs

The number of MLPs has more than tripled over the last ten years as the low interest rate environment has driven investor demand, and MLPs have raised more than $100 billion in IPOs since 2008.  According to Alerian (an independent provider of MLP and energy infrastructure market intelligence), as of December 31, 2015, there were 121 different MLPs with a total market capitalization of about $300 billion.  Just a year earlier, MLPs had a market capitalization of over $450 billion.

The top 10 MLPs (in terms of market capitalization) include Enterprise Products Partners, LP (EPD); Energy Transfer Partners, LP (ETP); Magellan Midstream Partners, LP (MMP); MPLX, LP (MPLX); Plains All American Pipeline, LP (PAA); Buckeye Partners, LP (BPL); Williams Partners, LP (WPZ); ONEOK Partners, LP (OKS); Enbridge Energy Partners, LP (EEP); Sunoco Logistics Partners, LP (SXL).

In addition to buying individual MLPs, investors may invest in MLPs through a variety of funds that invest in MLPs.  Investors may gain MLP investment exposure through exchange-traded funds (ETFs), mutual funds (open-end funds), closed end funds, and structured notes.  Although these products are available to retail investors, many are not easily understood, such as structured notes that are issued by and are the obligation of a financial institution, but have payoffs that are linked to the returns of an MLP index.

As global energy prices have declined over the past year, MLPs have suffered staggering losses.  The Alerian MLP Index, which tracks the performance of the 50 largest MLPs, declined by 32.6% in 2015. Not surprisingly, the returns of ETFs investing in MLPs have declined precipitously:  the Alerian MLP ETF (AMLP) lost 35.9% from January 1, 2015 to January 31, 2016.  Similarly, the Global X MLP ETF (MLPA) lost 39.2% over that timeframe.  Smaller MLPs suffered even greater losses: Atlas Energy (ATLS) lost a staggering 91.3%, Plains All American Pipeline (PAA) lost 54.4%, and Enbridge Energy Partners LP (EEP) lost 50.8%.  The following charts illustrate the dramatic losses suffered by MLP investors since 2015.

MLP-ETF-Losses-1                                           MLP-ETF-Losses-2

What are the risks of MLPs?

MLPs carry two primary risks:  stock-like characteristics and high concentration in one industry (energy).  First, they involve stock-like volatility and risk.  While they are promoted as fixed-income investments similar to bonds, an investment in MLPs represents an equity stake in the company.  Investors are subject to price movement of the MLPs and only share in profits after payment of debt (such as bond interest payments).  Investors replacing traditional fixed income investments (such as bonds) with MLPs may have unintentionally increased their portfolio’s volatility and risk profile.  Second, because of the legislation passed in the 1980s, MLPs are typically restricted to the energy sector.  Thus, MLPs have little diversification beyond different elements of the energy sector, and they will tend to rise and fall along with the price and volume of energy products being produced and sold.  Another less commonly discussed risk is lack of management control.  In a traditional corporation, the management is controlled, at least indirectly, by the voting power of the shareholders.  In an MLP, however, management is vested in the general partner.  Limited partners, despite the amount of interest in the MLP they may own, have very limited control over the management and operations of the MLP.

Many investors held portfolios that were overly concentrated to these products.  Even a diversified portfolio of MLPs remains heavily concentrated in exposure to the energy sector.  Additionally, structured notes contain counter-party risk and frequently use derivatives to embed leverage.

Here is a current list of MLPs and funds investing in MLPs by ticker symbol and name.  If you have invested in these products and suffered losses, we would like to speak with you.

Ticker Name
AHGP Alliance Holdings GP LP
ARLP Alliance Resource Partners LP
ALDW Alon USA Partners LP
AMID American Midstream Partners LP
APU AmeriGas Partners LP
AM Antero Midstream Partners LP
ARCX Arc Logistics Partners LP
APLP Archrock Partners LP
ATLS Atlas Energy Group LLC
ARP Atlas Resource Partners LP
AZUR Azure Midstream Partners LP
BSM Black Stone Minerals LP
BKEP Blueknight Energy Partners LP
BWP Boardwalk Pipeline Partners LP
BBEP BreitBurn Energy Partners LP
BPL Buckeye Partners LP
CLMT Calumet Specialty Products Partners LP
CPLP Capital Product Partners LP
CQP Cheniere Energy Partners LP
CNXC CNX Coal Resources LP
CPPL Columbia Pipeline Partners LP
CNNX CONE Midstream Partners LP
CEQP Crestwood Equity Partners LP
CAPL CrossAmerica Partners LP
CCLP CSI Compressco LP
UAN CVR Partners LP
CVRR CVR Refining LP
CELP Cypress Energy Partners LP
DPM DCP Midstream Partners LP
DKL Delek Logistics Partners LP
DM Dominion Midstream Partners LP
DMLP Dorchester Minerals LP
DLNG Dynagas LNG Partners LP
EMES Emerge Energy Services LP
ENBL Enable Midstream Partners LP
EEP Enbridge Energy Partners LP
ETE Energy Transfer Equity LP
ETP Energy Transfer Partners LP
ENLK EnLink Midstream Partners LP
EPD Enterprise Products Partners LP
EQGP EQT GP Holdings LP
EQM EQT Midstream Partners LP
EVEP EV Energy Partners LP
FGP Ferrellgas Partners LP
FELP Foresight Energy LP
GLOP GasLog Partners LP
GEL Genesis Energy LP
GLP Global Partners LP
GMLP Golar LNG Partners LP
GPP Green Plains Partners LP
HCLP Hi-Crush Partners LP
HMLP Hoegh LNG Partners LP
HEP Holly Energy Partners LP
JPEP JP Energy Partners LP
KMI Kinder Morgan
KNOP KNOT Offshore Partners LP
LGCY Legacy Reserves LP
LINE Linn Energy LLC
MMP Magellan Midstream Partners LP
MMLP Martin Midstream Partners LP
MEMP Memorial Production Partners LP
MEP Midcoast Energy Partners LP
MCEP Mid-Con Energy Partners LP
MPLX MPLX LP
NRP Natural Resource Partners LP
NAP Navios Maritime Midstream Partners LP
NSLP New Source Energy Partners LP
NGL NGL Energy Partners LP
NKA Niska Gas Storage Partners LLC
NTI Northern Tier Energy LP
NS NuStar Energy LP
NSH NuStar GP Holdings LLC
OCIP OCI Partners LP
OKS ONEOK Partners LP
PBFX PBF Logistics LP
PTXP PennTex Midstream Partners LP
PSXP Phillips 66 Partners LP
PAA Plains All American Pipeline LP
RNF Rentech Nitrogen Partners LP
RHNO Rhino Resource Partners LP
RMP Rice Midstream Partners LP
RRMS Rose Rock Midstream LP
SPP Sanchez Production Partners LP
SDLP Seadrill Partners LLC
SHLX Shell Midstream Partners LP
SXE Southcross Energy Partners LP
SEP Spectra Energy Partners LP
SRLP Sprague Resources LP
SGU Star Gas Partners LP
SPH Suburban Propane Partners LP
SMLP Summit Midstream Partners LP
SXCP SunCoke Energy Partners LP
SXL Sunoco Logistics Partners LP
SUN Sunoco LP
TEP Tallgrass Energy Partners LP
NGLS Targa Resources Partners LP
TCP TC PipeLines LP
TGP Teekay LNG Partners LP
TOO Teekay Offshore Partners LP
TNH Terra Nitrogen Co LP
TLLP Tesoro Logistics LP
TLP TransMontaigne Partners LP
RIGP Transocean Partners LLC
USAC USA Compression Partners LP
USDP USD Partners LP
VLP Valero Energy Partners LP
VNR Vanguard Natural Resources LLC
VNOM Viper Energy Partners LP
VTTI VTTI Energy Partners LP
WGP Western Gas Equity Partners LP
WES Western Gas Partners LP
WNRL Western Refining Logistics LP
WLKP Westlake Chemical Partners LP
WMLP Westmoreland Resource Partners LP
WPZ Williams Partners LP
WPT World Point Terminals LP
 

 

Exchange-Traded Funds

AMLP Alerian MLP ETF
AMJ JP Morgan Alerian MLP Index ETN
MLPI UBS ETRACS Alerian MLP Infrastructure Index
MLPN Credit Suise  X-Links Cushing MLP Infrastructure ETNs
AMU ETRACS Alerian MLP Index ETN
IMLP iPath S&P MLP ETN
MLPA Global X MLP ETF
ATMP Barclays ETN+ Select MLP ETN
MLPL UBS ETRACS 2xLeveraged Long Alerian MLP Infrastructure Index
MLPX Global X MLP & Energy Infrastructure ETF
EMPL First Trust North American Energy Infrastructure Fund
YMLP Yorkville High Income MLP ETF
MLPO S&P MLP ETN
MLPY Morgan Stanley Cushing MLP High Income ETN
ZMLP Direxion Zacks MLP High Income Shares
MLPB ETRACS Alerian MLP Infrastructure ETN B
YMLI Yorkville High Income Infrastructure MLP ETF
AMUB ETRACS Alerian MLP Index ETN Series B
AMZA InfraCap MLP ETF
TPYP Tortoise North American Pipeline Fund
MLPG UBS ETRACS Alerian Natural Gas MLP Index
YGRO RBC Yorkville MLP Distribution Growth Leaders Liquid Index ETN
MLPV ETRACS 2xMonthly Leveraged S&P MLP Index ETN
MLPW UBS ETRACS Wells Fargo MLP Index
MLPS ETRACS 1xMonthly Short Alerian MLP Infrastructure Total Return ETN
MLPJ Junior MLP ETF
 

 

Open End Funds

TORTX Tortoise MLP and Pipeline
MLOAX Cohen & Steers MLP & Energy Opportunity Fund
TMLAX Transamerica MLP & Energy Income
LCPAX Clearbridge Energy MLP & Infrastructure Fund
MLPFX Oppenheimer Steelpath MLP Select 40 Fund
INFRX Advisory Research MLP and Energy Income
PRPAX Prudential Jennison MLP Fund
MLPPX MLP and Energy Infrastructure Income Fund
SMAPX Salient MLP and Energy Infrastructure Fund II
GLPAX Goldman Sachs MLP Energy Infrastructure Fund
EGLAX Eagle MLP Strategy Fund
ILPAX Invesco MLP Fund
MLXAX Catalyst MLP & Infrastructure Fund
MLPAX Oppenheimer Steelpath MLP Alpha Fund
CCCAX Center Coast MLP Focus
BPMIX BP Capital TwinLine MLP Fund
AMLPX Maingate MLP
MLPDX Oppenheimer Steelpath MLP Income Fund
CSHAX Cushing MLP Premier Benefits Fund
MLPLX Oppenheimer Steelpath MLP Alpha Plus Fund
HEFAX Highland Energy MLP Fund
VMLPX MAI Energy Infrastructure and MLP Fund
 

 

Closed End Funds

FIF First Trust Energy Infrastructure
FPL First Trust New Opportunities MLP and Energy Fund
GER Goldman Sachs MLP and Energy Renaissance Fund
FEN First Trust Energy Income and Growth
CEN Center Coast MLP & Infrastructure Fund
TPZ Tortoise Power and Energy Infrastructure
KYN Kayne Anderson MLP Investment Company
TTP Tortoise Pipeline and Energy
KYE Kayne Anderson Energy Total Return Fund
NML Neuberger Berman MLP Income Fund
SRV Cushing MLP Total Return Fund
GMZ Goldman Sachs MLP Income Opportunities Fund
SMM Salient Midstream and MLP Fund
TYG Tortoise Energy Infrastructure Corp
NTG Tortoise MLP Fund
FMO Fiduciary/Claymore MLP Opportunity
JMPL Nuveen All Cap Energy MLP Opportunity Fund
JMF Nuveen MLP Total Return Fund
SRF Cushing Royalty and Income Fund
KED Kayne Anderson Energy Development Company
CEM ClearBridge Energy MLP Fund
KMF Kayne Anderson Midstream/Energy
CBA Clearbridge American Energy MLP Fund
EMO ClearBridge Energy MLP Opportunity Fund
DSE Duff & Phelps Select Energy MLP Fund
CTR ClearBridge Energy MLP Total Return Fund
MIE Cohen & Steers MLP Income and Energy Opportunity Fund

Fishman Haygood represents investors who have suffered investment losses in claims against their brokers or financial advisors. Our experienced attorneys have brought securities fraud cases in state and federal courts across the nation, as well as in FINRA arbitration. We work to help investors recoup their losses.

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