What happened
Shares of pipeline company Enbridge (ENB 0.87%) and master limited partnerships (MLPs) Phillips 66 Partners (PSXP), Enterprise Products Partners (EPD 1.60%), and Energy Transfer Partners (ET 1.23%) fell more than 20% in March, according to data provided by S&P Global Market Intelligence.
Enbridge shares were down 22.3%. Phillips 66 Partners saw its unit price (MLP-speak for share price) fall by an even 33%. Enterprise Products Partners units tumbled 38.7% for the month, while Energy Transfer's shares plunged a jaw-dropping 58.5%
The drops pushed the companies' already-generous dividend and distribution yields even higher. They're all currently yielding between 8% (Enbridge) and a dangerous 21.6% (Energy Transfer).
Image source: Getty Images.
So what
When oil prices go south, so do the share and unit prices of companies across the energy industry, whether such a drop is warranted or not. Global oil prices were cut nearly in half during March as a result of a price war breaking out between Russia and Saudi Arabia, both of which began to flood the market with cheap crude.
But unlike oil drillers, midstream pipeline companies don't usually have much, if any, direct exposure to swings in commodity prices. Instead, they usually derive the bulk of their income from a "tollbooth" model: Customers pay a certain amount based on how much product they ship through the company's pipelines.
Many of these contracts to ship oil or refined products through a company's pipelines are further insulated from commodity price shocks. Some are regulated by government agencies, while others are long-term volume-based contracts. Still others are "take or pay" contracts, in which a customer buys a percentage of pipeline capacity and then pays a set rate whether the customer uses that full capacity or not. This type of income is considered reliable, even when oil prices drop.
The amount of reliable income these pipeline companies make is quite high. For example, Enterprise Products Partners and Energy Transfer derive about 85% of their cash flow from reliable contracts. Enbridge boasts that more than 95% of its cash flow comes from reliable sources. A current figure isn't available for Phillips 66 Partners, but in past years it has derived more than 75% of its cash flow from reliable sources.
Now what
Low oil prices seem unlikely to directly affect these pipeline companies' operations. Maintaining projected growth levels may be an issue, though.
Because the oil price slump has hit U.S. shale producers particularly hard, most have cut their capital spending plans for 2020, and some are even walking away from shale altogether. Several planned pipeline projects were slated to run from the Permian shale basin to the Gulf Coast, or to service other shale plays. With production dropping dramatically, the plug may have to be pulled on some of these growth projects, affecting midstream pipeline companies looking ahead.
Still, the inflated yields that have resulted from the price drops will probably make these companies worth buying for dividend investors even if short-term growth suffers. The one exception is Energy Transfer, whose current 21.6% yield is unlikely to be sustainable. The company also has a high level of debt compared to its peers, after years of aggressive growth spending. Certainly the market was concerned that a dividend cut might be coming, which is one reason Energy Transfer's unit price fell further than the others'.
