Industry observers say they anticipate some energy companies will delay master limited partnership IPO debuts.
"I've heard of at least one deal that was delayed and pulled due to pricing indicators," said Richard Burleson, a Texas energy sector corporate finance lawyer, without giving details. "Some people are evaluating whether it's a good strategy."
Companies with an MLP structure -- and those who invest in them -- may face other challenges from a scheme in which some general partners enjoy payouts well in excess of 2% ownership interest.
Burleson and others point to political reforms that could end MLPs' sweet tax breaks. "When the Canadian government changed the royalty (tax) structure, it had a devastating effect on drilling," Burleson said. "There's certainly the concern that the same thing could happen in the US... A Democratic Congress is not always acting in the best interest of the (MLP) constituency."
Burleson referred to calls this year for a tax levy on investment funds such as private equity firms and hedge funds, adding MLPs also could become vilified if the debate gets revisited.
"All MLPs are watching [the tax debate] very carefully to make sure the baby doesn't get thrown out with the bathwater," said another Texas-based lawyer who preferred not to be identified.
One proposal Congress considered this year could expose MLPs to a 35% corporate tax rate, said Mary Lyman of the National Association of Publicly Traded Partnerships.
Michael Doss, vice president and senior credit officer at Moody's, thinks it is unlikely that energy MLPs will be tarred with the same brush as private equity and hedge funds.
But companies with an MLP structure -- and those who invest in them -- may face other challenges from a scheme in which some general partners enjoy payouts well in excess of 2% ownership interest. "GPs (general partners) get a disproportionate share of the upside," said S&P exploration and production credit analyst David Lundberg.
In a September 12 report, Moody's Doss said general partners' rich payments could "over time raise the cost of capital necessary for growth and therefore reduce long-term competitiveness."
"Reduced competitiveness resulting in slower growth could translate into lower unit performance, further increasing the cost of equity, and potentially setting the stage for increased use of leverage, various forms of financial engineering or additional risk-taking -- any of which could pressure ratings," wrote Doss. He said in an interview he sees the MLP spurt tapering off in late 2008.
Midstream MLPs are seen as a better investment than upstream ones because cash flows are less volatile, Lundberg said. "You have no direct exposure to commodity or depletion risk," unlike upstream players which must invest in new reserves or acquisitions.
Meanwhile, MLPs will become more leverage-heavy. Moody's will be "closely monitoring this issue going forward," Doss wrote.
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