Boardwalk Partners (BWP) units traded down 46% in one day after the company announced net income declined 78% and dividend distributions were dropped more than 80%. With a market cap after the share price crash of ~$3.2 billion, unitholders lost ~$3 billion today in aggregate.
This is a stunning reminder to MLP investors that equity in MLPs is not necessarily "safe." Dividends are not necessarily "secure." Despite a long track record of raising dividend levels and consistently paying dividends, Boardwalk's underlying business shifted, leading to an inability to sustain dividends and a necessity to shift cash flow to paying down debt.
I mentioned this risk in this article where I mentioned that, despite its large size and strong dividend history, dividend paying MLP Linn Energy (LINE) (LNCO) was more risky than the market had been pricing in, and had subsequently underperformed a smaller, less liquid, but more secure convertible preferred that paid a higher dividend. Obviously LINE has substantially outperformed BWP subsequent to the precipitous drop in BWP unit prices, so perhaps my focus should have been on BWP and other pipeline MLPs. And LINE has successfully completed its merger with Berry Petroleum, shoring up its cash flow and proved reserves relative to debt levels.
One other MLP to consider that could be particularly risky is Kinder Morgan (KMP). Hedgeye, an investment research firm, posted a report advocating shorting/selling Kinder Morgan units, and a summary of their argument was written up in Barron's. The argument is that Kinder Morgan's dividend is unsustainable and that the company under-invests in its pipelines in order to free up cash to pay its dividend. It could now also face issues similar to Boardwalk, as production shifts to different parts of the countries, making certain pipelines less valuable or even potentially obsolete.
It is not necessary to take the kinds of risks investors were taking investing in BWP or are currently taking investing in KMP and other such MLPs trading at large premiums to their underlying asset values. There are other ways to get yield. And there are other ways to get exposure to undervalued energy stocks, and sometimes even get rapid growth thrown in "for free." Just because a stock or unit paid a dividend does not mean it will in the future. The $3 billion in BWP equity losses were preventable with some due diligence and were avoided by investors with a strong value focus. Caveat emptor.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.