Pipeline Sector Rallies After `Overreaction' to New Tax Policy
(Bloomberg) -- U.S. pipeline operators bounced back from their worst day in two years after management teams argued that a change in federal tax policy will hardly impact their bottom lines.
Companies from billionaire Kelcy Warren’s Energy Transfer Partners LP to pipeline giant Enterprise Products Partners LP issued a slew of statements following Thursday’s declines on Wall Street as they sought to downplay the significance of the Federal Energy Regulatory Commission’s ruling that master-limited partnerships can no longer get credit for income taxes they don’t actually pay.
The heart of their arguments was that the ruling targets only a slice of America’s fast-expanding network of natural gas and oil pipelines. The affected assets are large, interstate pipelines that, generally speaking, were built in an era of little competition in shipping America’s fossil fuels -- back when government oversight of shipping rates was essential.
In the shale age, that’s often not the case.
“The initial sell off was an overreaction that assumed all pipelines in the U.S. are FERC-regulated and that their cash flows were immediately going to fall,” said Rob Thummel, managing partner at Tortoise Capital Advisors. “The reality is the majority of pipelines in the U.S. are not FERC-regulated. They’re regulated by the market, and the market will determine the rates.”
The Alerian MLP Index, which tracks 40 master-limited partnerships, climbed 2.4 percent as of 11:46 a.m. in New York trading. After the FERC ruling Thursday, the index plunged about 10 percent. While it pared some of that, it still ended the day at levels last seen during the oil crash of early 2016.
The sell off put plenty of pipeline management teams in a defensive crouch.
Enterprise Products said four times in a three-paragraph statement that the tax ruling won’t have any “material” impact on earnings and cash flow. Andeavor Logistics LP said the ruling would probably only hurt the $10 billion company’s earnings by $10 million or less. Magellan Midstream Partners LP said it expects to see no "material impact" from the ruling because most of its rates are negotiated or market-based.
And Tallgrass Energy Partners LP said that its two top pipelines, Rockies Express and Pony Express, have negotiated rate contracts and the company expects the ruling would have little to no impact on these revenues.
“We do not expect the change in tax rate to impact the current revenue levels,” said Vicki Granado, a spokeswoman for Energy Transfer Partners. The company said in statement that many of its rates aren’t subject to the changes.
Part of their rationale is that many interstate pipelines, especially ones built in recent years, charge rates that are determined through negotiations or by market forces -- and thus aren’t subject to FERC regulation.
Even among the pipelines that will be targeted -- which have so-called “cost of service” rates -- the impact may be muted. Beyond just the income-tax allowance that FERC is doing away with, the rates for these assets incorporate things like pipeline maintenance and depreciation costs, Selman Akyol, an analyst at Stifel Nicolaus & Co. said in a note Thursday. Some companies haven’t been compensated for those other costs in decades, and will soon seek to recoup them as they lose their special tax treatment.
Of course, not everyone’s convinced Thursday’s sell off was an overreaction. There are still plenty of unanswered questions, including a worst-case scenario in which MLPs are liable for back tax allowances, Matthew Phillips, an analyst at Guggenheim Securities LLC, said in a note.
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