Some MLP investors are understandably baffled by the selloff of Andeavor Logistics LP (NYSE: ANDX) following the announcement of Marathon Petroleum Corp.’s (NYSE: MPC) proposed $23.3 billion acquisition of the partnership’s sponsor Andeavor (NYSE: ANDV).
After all, shouldn’t good news for Andeavor be good news for its MLP subsidiary?
But one of the recurring issues with the MLP space is corporate governance. When these types of mergers happen between two sponsors that each own their own MLP subsidiaries, the market worries that the acquirer will favor its MLP over its acquisition target’s MLP.
MLP valuations are based on the extent to which a partnership can grow its cash flows to distribute to shareholders. The concern is that the dropdown transactions that drive this growth will dry up for the target’s MLP, essentially giving it orphan status.
That resulting uncertainty is what’s causing the price of ANDX to drop today.
The earlier conference call didn’t reveal much about Marathon’s plan for ANDX. It sounds like they’ll decide how to proceed after the transaction closes.
Odds are they will move to consolidate the two MLPs by rolling up ANDX into MPLX.
The one potential complicating factor in this regard is that MPLX recently completed a number of significant dropdown transactions along with buying out its sponsor’s incentive distribution rights.
So it may take a little while before MPLX is ready to swallow another sizable deal. And because Marathon will own a substantial interest in ANDX, the eventual acquisition may not involve much of a premium, if any.
I hate selling a stock when it’s getting hammered, especially a high-quality MLP like ANDX, which is down around 9% today.
But I’ve now seen enough of these scenarios to know that ANDX could suffer continued selling pressure until the new owner eventually provides clarity about its ultimate plan for the MLP.
In the past, I’ve watched similar high-quality MLPs decline anywhere from 20% to 25% from where they closed prior to the announcement that their sponsor is being acquired. Typically, that re-rating happens almost immediately.
However, ANDX is down a little less than half that much so far. Perhaps there’s something different about this situation compared to the others.
But assuming its sponsor is acquired, the only catalyst that would lift ANDX’s unit price from these levels is if there’s speculation that MLPX will eventually acquire it at a premium.
Sometimes these rollup transactions occur at market prices. Other times, there’s a modest premium to help ward off potential litigation.
Waiting for the rollup would mean accepting the potential for a further price decline, though you’d still be collecting a nice distribution in the interim. Assuming the eventual merger is done through a units-for-units transaction, that would also allow you to continue deferring any tax liabilities.
Otherwise, ANDX is now a SELL.