Demand for Downstream MLP units in the 2016 Market

2015 was an interesting year for mergers and acquisitions in the downstream energy industry. In a market where MLPs are common, low oil prices and threats of rising interest rates put a pause in MLP creation and certain companies going public.

At Corner Capital, we’re used to changing trends. We’ve seen a lot of investment patterns, and we’ve seen those patterns change. For 2016, we’re looking closely at Master Limited Partnerships and how they will affect acquisition pace for retail and institutional investors.

MLP units have been rising in demand for a while, but in 2015, MLPS were the leading players and consolidators in the convenience and gas industry. Though the creation of new MLPs was slowed in 2015, existing partnerships fared well.

Existing MLPS weren’t immune to market challenges, however. Threats of rising interest rates negatively impacted MLP unit prices (the equivalent of stock shares). With further interest rates increases on the horizon, MLPs will have to be strategic in their M&A dealings.

Though energy-infrastructure MLPs have seen valuations plunge approximately 60% since last summer, economists note that many MLPs are currently improving cash flow. Currently, some MLPs are paying attractive dividend yields to encourage investors to wait out the energy downturn. This is due to the quality of assets in individual downstream MLPs.

There’s no doubt that many MLPs will face hard choices in 2016. But with foresight and an ability to manage conversations, many partnerships have the ability to maintain positive acquisition values. It should be known that most M&A activity will be financed by debt, since unit prices are historically low.

So, though unit prices for downstream MLPs have fallen over the past year, fundamental performances contradict this decline. Factors such as falling crude and macro-level volatility have put a damper on the entire energy sector- downstream, upstream, and midstream. However, since downstream MLPs have maintain quality and are likely to continue to seek high quality assets in order to grow their bottom line, we expect M&A activity by downstream MLPs to continue in 2016.