Bauer Analysis Sees Uptick in Risk
A recent Forbes article by Bauer College Executive Professor Chris Ross draws on student research to show the evolution of Midstream Master Limited Partnerships, which were “created as tax efficient entities to own and operate energy infrastructure assets and distribute most of their cash flow to their general and limited partners.”
As part of a series of shareholder value research classes, Bauer students found that from 2003-2013, “MLPs provided exceptional returns to their unit holders, with the Alerian MLP Index advancing at twice the rate of the S&P 500 Index. The drivers of this appeared to be strong growth in revenues, with less significance given to returns on assets,” Ross writes.
“In late 2014, global oil prices collapsed, and midstream companies’ valuations followed soon after… this provided a stress test for the sector and revealed that MLPs with higher general partner (GP) take through normal and incentive distribution rights suffered higher value erosion. We questioned the viability of incentive distribution rights in an environment that may be less supportive of aggressive growth strategies.”
A new class of 12 students researched the midstream sector during the Fall 2017 semester. The 2017 class found a very different business environment than the earlier class.
“The midstream sector had become about twice as risky in the period 2014-16 as it was in 2009-14,” Ross writes.
“MLPs have historically held a substantial tax advantage over traditional midstream firms due to favorable treatment of depreciation and, as a partnership, avoidance of double taxation incurred by C-Corps. The new tax plan lowers the corporate tax rate and reduces the cost of double taxation, lowering the MLP advantage.”
By Julie Bonnin