Marathon’s Buy Shows MLPs Thrive After Kinder Morgan Exit

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Rumors of the demise of MLPs have been greatly exaggerated.

That’s the message behind Marathon Petroleum Corp.’s proposed $15.8 billion purchase of MarkWest Energy Partners LP, which would create the fourth-largest master-limited partnership in the U.S. Recent efforts to consolidate Williams Cos. and Kinder Morgan Inc., the pioneer of MLPs, had investors wondering if the days were numbered for the popular investment vehicle.

“This particular merger shows that the MLP structure is still viable, and that people are still pursuing it,” said Emily Hsieh, director of operations for the MLP indexing firm Alerian. “People were shocked by Kinder, and then when Williams announced, people thought two makes a trend.”

Master-limited partnerships combine the benefits of income tax exemptions with the liquidity of publicly traded shares, known as units. The partnerships may own refining, transportation, production or processing assets, and distribute substantially all of their income back to unit holders.

Those distributions from MLPs have been especially attractive to investors after more than six years of near-zero interest rates.

“Investors are expecting not just yield, but yield plus growth,” Hsieh said.

Marathon Petroleum’s merger with MarkWest shows that the company is planning for long-term growth by diversifying, adding MarkWest’s natural gas assets to its existing petroleum operations, Hsieh said.

Marathon created its pipeline unit MPLX LP in 2012, the year after it was spun out of producer Marathon Oil Corp.

Kinder Morgan

The cash streams may not be sustainable if MLPs can’t find new revenue-generating assets. To keep growing, MLPs need to borrow money to expand or issue new units.

Increasing payouts to satisfy unit holders has become a challenge, which is why Kinder Morgan decided to “buy in” its unit holders last year and become a traditional corporation instead.

Pipeline operator Williams Cos. attempted a similar maneuver this year. Billionaire Kelcy Warren, founder and chairman of Energy Transfer Partners LP, wants the deal put on hold as he attempts a takeover of the company. Williams began an auction process to sell itself after rejecting Warren’s $48 billion bid last month.

Investment in MLPs surged in the past several years as the U.S. shale revolution spurred infrastructure development. Flows into MLP exchange-traded products rose to $4.3 billion last year, a sevenfold increase from $613 million in 2009, according to Morningstar, Inc.

“People looking for income-oriented investments really like MLPs,” said Syarifa Galeb, an energy analyst with Bloomberg Intelligence. “They’re getting a much higher yield than treasuries.”

The Alerian MLP ETF yielded 7.3 percent in the past year, compared with an average of 2.2 percent for 10-year U.S. Treasuries over the same period. Despite that advantage, investor interest ebbed after oil prices fell 48 percent since July 2014 to $52.20 a barrel.

“Over the last few years you had huge growth in investment because of shale development,” said Michael Kay, an energy analyst with Bloomberg Intelligence. “Now people are getting a little more cautious and investment is slowing down because of what’s happened with commodity prices.”

(An earlier version of the story corrected status of Williams affiliate transaction in 10th paragraph.)

(Updates with history of Marathon pipeline unit in eighth paragraph.)
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