Uncorporates: changes in master limited partnerships

Abstract

Purpose The purpose of this paper is to examine how major changes in an industry may differentially affect firms based on their organizational structure. The authors examine midstream oil and gas firms, comparing master limited partnerships (MLPs or uncorporates) with more traditional midstream corporate firms when the industry changed from one that was considered mature to a more rapid growth industry. Design/methodology/approach Non-parametric comparisons of returns, distributions, and operating ratios are presented across the two organizational forms and across two distinct industry activity periods. The risk-adjusted return analysis, including Fama and French factors, incorporates a wild bootstrap to address heteroscedasticity in the data. Findings In the industry’s mature market period, partnerships provided a significantly greater payout, return, return on equity (ROE), cash flow, and lower leverage, while exhibiting lower levels of systematic risk than corporations. In the later growth period, midstream corporations and partnerships are no longer significantly different in their returns, ROE or margins. MLPs now have significantly higher leverage levels, while continuing to provide significantly higher dividend payouts. Originality/value The paper contributes to the literature with an analysis of the effects of a changing industry environment on two different organizational types across a common industry. The authors find that the optimal organizational structure may be dependent on the environment. The findings during the initial period are consistent with prior research comparing publicly traded partnerships and corporations. During the growth phase, the findings lend support to the seminal literature with respect to corporations potentially best-suited to “growth” industries, while highlighting specific results by organizational form.

The value of tunneling: Evidence from master limited partnership formations

“…Although this increase mirrors overall market trends, it is possible that this also reflects a trend toward a more growth‐focused strategy among MLPs. During the late 1990s, Kinder Morgan Energy Partners LP set an example of growth through acquisitions that were followed by many subsequent MLPs (Creswell, 2003; Kendall & Rogers, 2017; Mandell & Atanassov, 2018). Whether new, second‐wave MLPs will be content to hold and operate existing mid‐stream assets or will seek to expand—organically or through acquisitions—is difficult to assess ex‐ante .…”