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Master limited partnerships (or MLPs) differ from regular stocks in that interests in them are referred to as units and unitholders (not shareholders) are partners in the business. Importantly, these hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities. The assets that these partnerships own typically are oil and natural gas pipelines and storage facilities.
The Zacks Oil and Gas - Refining & Marketing MLP industry is a sub-sector of this business model. These firms operate refined products' terminals, storage facilities and transportation services. They are involved in selling refined products (including heating oil, gasoline, residual oil, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum).
Let’s take a look at the industry’s three major themes:
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Most MLPs derive their revenues based on the amount of fuel transported and are relatively insulated from oil and refined product price fluctuations. The defensive, fee-based business model not only provides cash flow stability to the refining and marketing MLPs but also make long-term distribution growth more predictable. Since the revenues they earn are volume-driven and often under long-term contracts, the pipeline operators are likely to enjoy stable demand for their services even if the U.S. economy slows.
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The fortunes of downstream refining and marketing MLPs are tied to the underlying developments in their business. Therefore, with domestic supplies of gasoline – the most widely used petroleum product – currently above the five-year average range, the industry operators should brace themselves for continued weakness in margins. The fuel's crashing profitability on the back of high inventories will also hurt earnings and the cash flows at a time of the year that typically sees heightened demand for gasoline with the start of the U.S. summer driving season. Further, United States’ planned tariffs on Mexico could make oil imports (Maya crude, Mexico's primary grade of oil) more expensive for the production of petroleum products. The implication would be lower profit margins for refiners, possibly trickling down to the transportation infrastructure providers.
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The sentiment among pipeline investors remains cautious following the FERC policy revision (per orders issued on July 2018) that signaled significant future changes on how the pipeline partnerships will go about treating income taxes in their books of accounts. Partnerships charging cost-based rates for interstate transportation service would have to lower customer tariffs to move oil, gas and refined products around the country by the amount of their income tax allowances — substantial in certain cases. A reduction in cost recovery would likely cut into their cash flows. With the new rule expected to be adopted only by 2020, the issue may remain a thorn in the flesh for the foreseeable future.