Height Capital Markets: MLP Sell-Off Was An Overreaction

The Alerian MLP AMLP has bounced back from a steep Thursday sell-off of more than 8 percent, gaining another 2.2 percent on Friday. The volatility is related to a tax decision by the Federal Energy Regulatory Commission, which rolled back a longstanding policy of allowing MLPs to claim an Income Tax Allowance when reporting appropriate oil and gas pipeline costs.

The decision initially spooked MLP investors, but Height Capital Markets analyst Katie Bays said the knee-jerk reaction to the news was overkill.

“Reactions across the MLP pipeline names were mixed, but we believe they almost certainly overstated the impact of FERC’s actions yesterday,” Bays said in a Friday note. 

The ruling essentially closes a tax loophole that MLPs have taken advantage of for 13 years that has allowed them to double-recover income tax costs, the analyst said. 

FERC outlined a new proposed rulemaking process to potentially lower interstate natural gas pipeline cost-of-service rates in the wake of corporate tax reform.

“While the FERC actions were meaningful, they should not induce panic among investors, as there is an implementation timeline for these changes, opportunities for appeal and steps that pipelines can take to mitigate negative impacts,” Bays said.

She pointed out that companies such as Magellan Midstream Partners, L.P. MMP and Enterprise Products Partners L.P. EPD have already assured investors that the FERC actions will have a limited impact on their businesses.

Bays expects more MLPs will likely follow suit with their own statements in coming days once details about the changes become clearer.

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