Energy Sector Ideas

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>>> Tax ruling sparks selloff of once-hot MLPs, and other energy stocks



By Claudia Assis

Mar 18, 2018



https://www.marketwatch.com/story/tax-ruling-sparks-selloff-of-once-hot-mlps-and-other-energy-stocks-2018-03-15?siteid=bigcharts&dist=bigcharts



Midstream companies bear brunt of losses

A tax ruling triggered a selloff in MLP exchange-traded funds and MLPs on Thursday, with the headwinds spilling over to the broader energy sector as midstream companies bore the brunt of the losses.

The Federal Energy Regulatory Commission said Thursday it will no longer allow master limited partnership natural gas and oil pipelines to recover an income tax allowance in cost-of-service rates.

The Alerian MLP AMLP, +0.00% exchange-traded fund dropped as much as 11% on Thursday, and was recently down more than 7%, on track for its lowest close and its largest percentage decrease in two years. The ETF has lost 18% in the past 12 months.

Among MLPs, steepest losses included those of Plains All American Pipeline LP PAA, +0.42% and Energy Transfer Partners LP. ETP, -1.27%

Pipeline operators Williams Cos. WMB, -0.08% and EQT Corp. EQT, -1.92% led losses among energy companies on the S&P 500 index,

Names that are most exposed to the ruling included Enbridge Energy Partners LP EEP, +0.19% TC Pipelines LP TCP, -1.94% Spectra Energy Partners LP SEP, -1.01% , Williams Partners LP WPZ, +0.89% and Energy Transfer Partners, analysts at RBC said in a note.

“It will take more time to quantify the impact for each of these MLPs, but we do note that there are several potential offsets to the income tax exclusion,” they said in the note. Moreover, “most of the MLPs have market-based or negotiated rates as part of the cash flow mix (which are not impacted).”

MLPs, typically energy concerns in “midstream,” or the business of transporting and storing oil and natural gas, trade like a stock on exchanges. They pay no corporate taxes and pay out most of their cash flow to shareholders, who are technically partners.

Because they pay out most of their cash flow, however, they rely on debt to grow. The sector boomed alongside the U.S. energy boom, but as oil and gas prices continued to fall, MLPs have lost their luster.

The selloff Thursday was widespread and as such it created “a buying opportunity for names that have sold off but are not impacted” such as gathering and processing MLPs and the “downstream” oriented names, the RBC analysts said.

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