With the recent acceleration of master limited partnership simplification transactions, we find it appropriate to revisit the internally-generated cash flow shortfall present throughout much of the space. The table provides a breakdown of traditional free cash flow (cash from operating activities less all capital spending) relative to distributions paid, as well as a measure of the elevated financial leverage often found within the group.
In case you missed it, “Nearly 60 Distribution Cuts Later, We Maintain Our View on the Hazards of the MLP Business Model.”
By Kris Rosemann
We think it is worth noting that the two entities at the top of this list in terms of traditional free cash flow coverage of distributions paid have significantly reduced their distributions in recent years. Kinder Morgan’s (KMI) annual dividend per share of $0.50 in 2017 was less than its final quarterly dividend of $0.51 in 2015, though it has already returned to significant growth in the quarterly payout and expects to continue growing the dividend at a robust rate in the near term. Plains All American (PAA) has undergone a simplification transaction, and its quarterly distribution has been cut twice to its current level of $0.30 per share from the $0.70 per share distribution paid in the third quarter of 2016.
The rapid increase in simplification transactions across the MLP space, “Master Limited Partnership Simplifications on the Rise,” supports our ongoing thesis that the master limited partnership business-model has its share of flaws and may not be sustainable over the long haul. The massive discrepancies of internally-generated cash flow and distributions to limited partners, general partners, and non-controlling interests speak to this idea of unsustainability, and we continue to warn against investors relying on industry-specific measures of cash flow–namely distributable cash flow, which ignores growth capital spending–as an appropriate evaluation of the health of the businesses and the income streams they generate.
March 8, 2017: Trust the Numbers, Not Just Management, CFA Society Houston, Kris Rosemann and Brian Nelson, CFA
–> Handout 1: Pitfalls of Distribution Yield Analysis (pdf)
–> Handout 2: Linking P/DCF to Enterprise Free Cash Flow Valuation (pdf)
Pipelines – Oil & Gas: BPL, BWP, DCP, ENB, EPD, ETP, HEP, KMI, MMP, NS, PAA, SEP, WES
Related ETFs: AMLP, AMZA, KYN, AMJ, TYG, KYE, JMF, FMO, CEM, CBA, NML, SRV, MLPA, MLPI, FEN, NTG, GER, FEI, KMF, MLPQ, CEN, EMLP, MLPX, EMO, FPL, MIE, GMZ, DSE, TTP, SRF, CTR, MLPN, SMM, JMLP, MLPS, AMU, ENFR, ATMP, AMJL, MLPZ, IMLP, ILPRX, AMUB, MLPB, MLPO
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.