A high yield on a complicated partnership is compensation, not a gift

When a midstream partnership yields well above its peers, the market is being paid for something. It might be complexity, leverage, governance or a history of surprises. The high yield is compensation for one of those, and knowing which is the actual work.

Why the discount exists

A sprawling asset base built through acquisitions is harder to analyse than a simple one. A structure that favours insiders earns a governance discount. Leverage above peers raises the risk that distributions are cut in a downturn. Each of these widens the yield, and each is a reason rather than an oversight.

A yield gap can close. It closes when the reason goes away, not because the yield is high.

What I'm watching

• Leverage against the peer group
• Distribution coverage through a softer patch
• Acquisition activity, which has been the source of complexity before

Where I stand

Short, on the view that the discount reflects risks that have not gone away. The yield is the market pricing them, not missing them.

What would change my mind

Leverage falling to peer levels with coverage intact. That removes the main reason for the discount, and the yield gap would earn the chance to close.