January 18, 2016 – The Street
MLPs See Take-or-Pay Contracts at Risk Amid Low Energy Prices
By Carleton English
As oil and gas prices continue to be low in 2016 -- and oil prices continue to test new lows -- what is the outlook for energy-related master limited partnerships and their investors?
With the Alerian MLP Index (AMZ) down 15% so far in 2016, it is underperforming the S&P 500, which is down 8.4%. Put simply, the outlook so far for MLP investors seems to be a continuation of 2015, when the Alerian MLP fell 38%.
Read the full article here: http://realmoney.thestreet.com/articles/01/19/2016/mlps-see-take-or-pay-contracts-risk-amid-low-energy-prices
The boom in the MLP market also, in part, coincided with the shale boom in the U.S. Investors were also lured by the promise of returns that seemingly had little correlation to sometimes volatile energy prices. The MLPs were said to operate as toll roads, which meant that income was derived from the volume of traffic running through the pipelines. MLP contracts with oil and gas producers were generally "take-or-pay" contracts, meaning that the MLPs would collect their income even if shippers didn't ship product. The arrangement provides downside protection when times get tough. However, when times become dire, even contracts can be negotiated -- or even broken.
"Such contracts eventually run their course and in the meantime some of those shippers may not survive the downturn at worst or seek to renegotiate terms at best – jeopardizing even contracted MLP revenues," said Sandy Fielden, director of energy analytics at RBN Energy.
