October 21, 2015 / 9:57 PM / 4 years ago

MLP sector needs mergers, but deals carry doubt: investor

HOUSTON (Reuters) - The crude oil rout has left the crowded energy partnership sector ripe for consolidation while those same low prices have shaken investors so badly that no deal is a sure thing, a top investor told the Reuters Commodities Summit.

A worker prepares to transport oil pipelines to be laid for the Pengerang Gas Pipeline Project at an area 40km (24 miles) away from the Pengerang Integrated Petroleum Complex in Pengerang, Johor, February 4, 2015. REUTERS/Edgar Su

Pipelines and storage facilities, assets that energy companies frequently put into tax-efficient master limited partnerships (MLPs), are normally seen as toll roads with less exposure to volatile commodity prices.

But MLPs, which pay no corporate taxes and pass along profits in the form of dividends, have been hit hard in the crude price crash caused by oversupply. Yield-hungry investors worry about the partnerships’ ability to increase payouts as investment in new pipelines stalls.

“We’re really dealing with a problem we haven’t seen in 30 years,” said Greg Reid, president of investment firm Salient’s MLP Complex told the summit.

Salient, based in Houston, manages $4.5 billion in MLP investments.

The more than 50 percent drop in crude has exposed financial weaklings in the MLP sector that have cut dividends as cash flows shrink. The Alerian MLP index .AMZ is down 27 percent so far this year.

“Our view is that you probably need a lot of consolidation,” said Reid, who has been investing in MLPs for two decades. “We need fewer companies, bigger companies that can weather the storm.”

While the MLP sector could use more combinations, recent deals, especially big ones, were not embraced by Wall Street.

After Energy Transfer Equity LP’s ETE.N said in September it had struck a $33 billion mostly stock deal to buy pipeline company Williams (WMB.N), shares in both firms fell more than 10 percent.

Marathon Petroleum Corp’s (MPC.N) $15 billion deal for natural gas processor MarkWest Energy Partners LP MWE.N has not been good for investors in the refiner’s pipeline unit, MPLX LP (MPLX.N).

Units of both MPLX and MarkWest are down 35 percent since the deal - perceived as largely beneficial to Marathon Petroleum - was announced in July. The declines signal investors might not vote in favor of the takeover, said Reid, whose firm owns shares of MPLX.

“Shareholders are not feeling great about that deal, said Reid. “Marathon wants to get the deal done, but there’s a potential they will have to pay more.”

A spokesperson for Marathon declined to comment.

Smaller deals would be easier to finance and investors would likely welcome a larger cash components in any future deals, he said.

Reporting by Anna Driver, Terry Wade and Kristen Hays in Houston; Editing by Jeffrey Benkoe

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