6 Small-Cap Oil And Gas MLPs With High Yields

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Includes: BBEPQ, CLMT, ENP, FGP, MMLP, MVO
by: Zvi Bar

A Master Limited Partnership (MLP) is a type of partnership that is publicly traded on a securities exchange. MLPs combine the tax structure of limited partnerships with the liquidity of publicly traded securities. Usually, private partnerships are relatively illiquid compared to public equities.

Most MLPs are publicly traded oil and gas pipeline businesses that earn stable income from the transport of oil, gasoline and/or natural gas. Many derive their revenue based on the amount of product transported and are not sensitive to price fluctuations except where they affect demand. Some MLPs involve other natural resources, and certain other industries, but oil and gas are the most common.

When I say they are not sensitive to price fluctuations, I am not talking about an investor's buying price. Some MLPs do often sell off when oil goes down even where it is not necessarily hurt by that drop. Certain MLPs that are more exploratory are more sensitive to oil price, while the purer pipelines could see increased demand at lower prices. Additionally, the exploratory MLPs can be hyper-sensitive to oil spikes in either direction.

MLPs usually provide their investors, the limited partners, with distributions which are similar to dividends, but taxed differently. It is expected that the distribution growth of MLPs can grow at a rate at or ahead of inflation, based upon energy demand and price growth.

In this now highly volatile environment, many may consider these MLPs a sensible long-term investment. Below are six small-cap MLPs that currently yield between 8%-10%, as well as their 1-month and 2011-to date performance rates:

  1. Breitburn Energy Partners L.P. (BBEP)
    • Yield: 9%
    • 1-month performance: -13.30%
    • 2011-to-date performance: -14.19%
  1. Calumet Specialty Products Partners LP (NASDAQ:CLMT)
    • Yield: 9.8%
    • 1-month performance: -20.12%
    • 2011-to-date performance: -10.75%
  1. Encore Energy Partners LP (NYSE:ENP)
    • Yield: 9.1%
    • 1-month performance: -16.91%
    • 2011-to-date performance: -16.69
  1. Ferrellgas Partners LP (NYSE:FGP)
    • Yield: 9.6%
    • 1-month performance: -9.19%
    • 2011-to-date performance: -22.14%
  1. Martin Midstream Partners LP (NASDAQ:MMLP)
    • Yield: 8.6%
    • 1-month performance: -11.92%
    • 2011-to-date performance: -12.51%
  1. MV Oil Trust (NYSE:MVO)
    • Yield: 9.8%
    • 1-month performance: -16.69%
    • 2011-to-date performance: -5.62%

The last month has been harsh to these MLPs, much like the broader market. Beyond demand concerns, several of these MLPs also have oil and/or gas price exposure due to drilling and exploration businesses. See the 1-month chart, below:

click on image to enlarge

Click to enlarge

MLPs are partnerships, so they do not pay corporate income taxes. The tax liability of the MLP is passed on to its holders. Each investor receives a K-1 statement that details their share of the partnership's net income. That income is then taxed at the investor's individual tax rate. MLPs may also make cash distributions that are not taxed received, but reduce the cost of partnership shares/units and create a tax liability that is deferred until the MLP is sold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.