The More MLPs Leave, the More Crowded They Get

(Bloomberg) -- The MLP pool is getting mighty crowded – but mainly because folks keep getting out.

Ascension Thursday saw a host of master limited partnerships taken back up by Williams Cos. Inc., Enbridge Inc. and Cheniere Energy Inc. If not quite a sign of the end-times for MLPs, it was nonetheless a day of reckoning (see my take here), and not just for the (soon-to-be) departed.

Now, throw in the recently announced take-out of Tallgrass Energy Partners LP and also assume that Andeavor Logistics LP eventually ends up as part of MPLX LP following Marathon Petroleum Corp.’s acquisition of Andeavor. Assume also that Cheniere Energy’s roll-up of Cheniere Energy Partners LP Holdings is just an appetizer ahead of an ultimate main course of Cheniere Energy Partners LP. That would mean deals announced so far this year carry intimations of mortality for a chunky 15.3 percent of the Alerian MLP Index. If all six were taken out, then its membership would drop to a pro-forma 36 units, the lowest since the summer of 2004:

The More MLPs Leave, the More Crowded They Get

This being a pool of securities, as some exit, they take some of the water with them. That leaves the index more concentrated, dominated by a handful of large-cap MLPs, especially as valuations have collapsed since 2014.

The More MLPs Leave, the More Crowded They Get

Looking at the proportion of the index’s adjusted market cap accounted for by its top 10 members, and taking out the same set of names as above, the pro-forma level of concentration looks higher than it’s been in 16 years:

The More MLPs Leave, the More Crowded They Get

In reality, there’s a good chance Alerian would rebalance the index to take account of the exits as and when they happen. That dip in the line in late 2017 reflects a change in the index methodology designed to deal with this issue, capping individual weightings at about 10 percent. So as more MLPs disappear, the weights may be redistributed toward smaller constituents, potentially boosting prices in the short term. 

That doesn’t change how concentrated the pool is getting, though. For example, Williams Partners LP constitutes almost 17 percent of the holdings of Kayne Anderson MLP Investment Co., one of the larger closed-end MLP funds. Presumably, it will hold Williams Cos. stock after that deal closes. But here’s the thing: The fund can only do so comfortably because it is merging with another Kayne Anderson fund via a deal announced in February – done partly to let it hold a higher proportion of C-corp stocks.

Neat, right? Concentration among MLPs, spurred by a seismic shift in the investor base (see this), has in turn spurred concentration among the investment funds tracking them. It may end up being less neat for managers’ fees, though, if they end up holding more C-corps, like any old mutual fund.

Moreover, the underlying issue remains. As Hinds Howard, a midstream portfolio manager at CBRE Clarion Securities, put it to me on Thursday:

With pure MLPs, there are less than 10 you can own in size if you have more than $1 billion without seriously disrupting the market.

This week’s round of ticker-taking is aimed at attracting new investors for America’s energy infrastructure. In doing so, it adds to the challenge facing many of those left behind and may persuade more of them to get together.

To contact the author of this story: Liam Denning at ldenning1@bloomberg.net.

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