As lower for longer energy prices persist, there has been talk that some of the weakened master limited partnerships may need to cut distribution payments to stay afloat. Before they do that, they may want to look at Boardwalk Pipeline (BWP) as a cautionary tale.
Boardwalk Pipeline is a Texas-based midstream master limited partnership that operates 14,000 miles of pipeline in the U.S., and it indirectly serves customers in the Northeast and Southeast. In February 2014, the company announced in its fourth quarter 2013 earnings release that it was cutting its quarterly distribution to $0.10 from an anticipated $0.53, in order to "free up internally generated cash to help fund growth and reduce leverage in order to strengthen the balance sheet."
Several MLPs today can sympathize with leverage issues and weaker balance sheets due to persistently low energy prices. Similarly many are grappling with how they will maintain investor support and pay their distributions. Investors choose MLPs because they are supposed to provide a steady, tax-advantaged income stream. When times are tough and that income stream is threatened, investors understandably get nervous and flee.
For example, in the last month, the Alerian MLP ETF (AMLP) shed 21% and is down 40% for the year as investors lost conviction in the energy industry, and perhaps, the MLP structure.
"Many MLPs are expected to fall short on this front in the coming quarters, which will cause them to try and raise more funds in the secondary market, in order to maintain their dividend and credit ratings," David Peltier, who manages TheStreet's Dividend Stock Advisor portfolio, wrote in a note Tuesday.
Even Kinder Morgan (KMI), which no longer operates as an MLP, faces similar concerns as it is contending with cutting its high dividend in favor of allocating the funds elsewhere in the business to meet debt obligations. Shares of Kinder Morgan are down 39% for the month as the company's financing issues have become more apparent.
It is worth mentioning that Boardwalk's difficulties were due to problems with its pipeline and occurred before the dramatic decline in energy prices. Boardwalk faced problems when it had to issue contracts at lower transportation rates in order to stay competitive as new sources of natural gas were discovered, the company said in an October 2014 filing with the Securities and Exchange Commission.
The company's stock responded to the distribution cut by talking a swan dive overnight. While the company typically traded in the mid-$20s before the cut, the distribution cut resulted in the price of the stock being halved. Despite a bump in August 2014, the stock has not fully recovered and is now trading around $11.50.
If the past can ever be an indication of future results, MLPs that are considering distribution cuts may want to heed Boardwalk's warning before making cuts.