Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

A worrying trend of recent years has been the increase in the number of millennials sticking with mom and dad rather than striking out on their own.

Now the trend is spreading from that second bedroom you hoped to turn into a study to, of all things, the pipeline industry.

Late on Monday, Marathon Petroleum announced it was selling some barges and boats to its own master limited partnership, MPLX, for $600 million. This is as it should be. The whole point of creating MLPs is that you, as the parent company, get to tap into their cheaper cost of capital and sell them assets. And the more the MLP grows, the more you get paid in higher dividends over time. It is, as they say, a win-win.

Until it stops working. Then, your progeny can become something of a burden.

Sorry Mom
MPLX's gross indicated dividend yield
Source: Bloomberg

Marathon said on its fourth-quarter earnings call that it would sell the marine assets to MPLX for "a supportive multiple." And indeed it is: MPLX is paying just five times Ebitda. That is around half the level at which its own units trade and less than Marathon's own multiple.

Premium Grade
Enterprise value as a multiple of forward Ebitda
Source: Bloomberg

As Marathon indicated earlier, no cash will change hands; it will take its payment in new MPLX units. Furthermore, it won't take a dividend on those until the second quarter, after the deal closes.

So junior really is getting a helping hand during these tough times. It was generally understood, before the MLP sector fell out of favor, that these subordinates could afford to pay perhaps 10 times Ebitda for the oil sector's logistical bits and pieces. That worked when the sector was yielding 5 percent rather than 10 percent.

Part of MPLX's problem is that it was forced to bid up to acquire MarkWest Energy Partners late last year. Apart from the high price, it took on a lot of gathering and processing assets, the pipelines and other equipment closest to the oil and gas wells that really aren't like the more stable long-haul pipelines that investors tend to associate with the sector. MPLX dropped by 25 percent in one day last month when it slashed guidance. Despite a recovery since then, it remains one of the worst performing MLPs so far this year.

It should be noted that Marathon is at least stepping up to the plate to help its offspring with a discount. Other forms of assistance offered recently -- most notably Energy Transfer Equity's self-serving convertible preferreds for insiders -- aren't quite as generous as they might seem at first glance. The wider message, though, is that the baby boom in MLPs, so long viewed as an easy way to tap into yield-hungry investors, has come to a stop.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net