Despite Challenges, MLPs Continue To Raise Distributions

In 2012, warm weather, low natural gas prices and a cautious political environment are offset by record earnings, pipeline master limited partnerships' (MLP) distribution raises and increasing domestic production. In January, the Alerian MLP Infrastructure Index (AMZI) gained 2.2% on a total-return basis, as compared to the S&P 500 return of 4.5%.

In February, the Energy Information Administrations' (EIA) Short Term Energy Outlook reported that the average American expenditure for heating fuels has been lowered for the third consecutive time, primarily due to continued warm weather throughout most of the U.S. Natural gas expenditures are expected to decline by 11% and propane expenditures by 5%. Natural gas storage inventories continued to set record seasonal highs and natural gas prices fell by 17% in January, while propane prices fell 7%.

In response to such low natural gas prices, Chesapeake Energy Corp. announced a reduction in the number of dry gas wells to be drilled, preferring to focus on wells rich in oil and other high-value liquid components such as ethane, butane and propane. These wells are primarily found in Ohio, Texas, Wyoming and Oklahoma.

Also, the EIA's 2012 Annual Energy Outlook projects that the U.S. will be a net exporter of liquefied natural gas (LNG) by 2016, reflecting strong natural gas production, low domestic prices and growing demand for LNG outside of North America. In fact, Cheniere Energy Partners LP recently entered into a 20-year contract to sell LNG to a Korean natural gas company, once their export facility is completed around 2017. The EIA release also indicates that projected transportation-energy demand will be nearly flat (growing at an annual rate of 0.2% from 2010 through 2035), while energy consumption per capita will decline by an average of 0.5% per year during the same period. However, the U.S. dependence on imported petroleum products is expected to decline, primarily as a result of increased domestic oil production. On the natural gas side, shale gas is expected to be 49% of the total domestic natural production by 2035, up from 23% in 2010.

While midstream MLPs are traditionally not affected by changing commodity prices, Boardwalk Pipeline Partners LP reported earnings below consensus during the most recent earnings period due to lower natural gas transportation volumes. However, the company announced an expansion into the Eagle Ford shale, a liquids-rich play, and increased their quarterly distribution. If warm weather continues, MLPs exposed to natural gas prices or volumes (those without take-or-pay contracts) may decide to retain a higher portion of their earnings rather than continually raising their distributions.

Of the 25 companies in the AMZI, 19 raised their distributions during this past earnings season, while six kept them at previous levels. In the broader MLP space, Inergy LP is facing a challenging operating environment in the propane sector, and is considering resetting distribution levels to match the lower near-term cash flow. On the other hand, Magellan Midstream Partners LP, benefiting from higher petroleum prices, reported record earnings, raised their distribution and targeted a 9% distribution growth rate for 2012.

Enterprise Products Partners LP also reported record earnings, declared its thirtieth consecutive distribution increase, and is considering raising its distribution growth rate, dependent on their results in the Eagle Ford shale.

Maria Halmo and Emily Wang, CPA, are directors for Alerian, an independent indexing company that provides objective market information. More than $7 billion is directly tied to Alerian's indices, which include the leading benchmark of MLP infrastructure equities: the Alerian MLP Infrastructure Index (AMZI). For more information, please visit www.alerian.com