Recent Performance Review Of 5 High-Yield Small-Cap MLPs

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

An 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 with 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 MLPs 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 sectors. MLPs usually provide their investors, the limited partners, with distributions similar to dividends, but which are often taxed differently. MLP tax issues can make them unsuitable for IRAs and similar retirement accounts.

Below are five small-cap MLPs that currently yield over 8%, as well as their 1-month, 6-month and 2011-to date performance rates.

Breitburn Energy Partners L.P. (BBEP)

· Yield: 10.1%

· 1-month: 3.14%

· 6-month: -10.35

· 2011-to-date: -10.17%

Calumet Specialty Products Partners LP (CLMT)

· Yield: 10.5%

· 1-month: 4.78%

· 6-month: -9.58%

· 2011-to-date: -7.37%

Encore Energy Partners LP (ENP)

· Yield: 9.6%

· 1-month: -6.48%

· 6-month: -6.40%

· 2011-to-date: -10.76%

Ferrellgas Partners LP (FGP)

· Yield: 8.9%

· 1-month: 6.25%

· 6-month: -12.00%

· 2011-to-date: -11.25%

Martin Midstream Partners LP (MMLP)

· Yield: 9.3%

· 1-month: -4.91%

· 6-month: -17.23%

· 2011-to-date: -22.32%

Several of these MLPs have performed exceedingly well so far in the fourth quarter of 2011. Below is a chart of their equity performances since the start of the fourth quarter, not counting distributions paid, if any.

(Click to enlarge)

Click to enlarge

Nonetheless, the equity each of these small-cap MLPs is down between 7 and 23 percent so far within 2011, again before counting paid distributions. With distributions between 8.9 and 11 percent, these payouts account for between almost half to all of this depreciation.

It is expected that the distribution growth of pipeline MLPs can grow at a rate at or ahead of inflation, based upon energy demand and price growth. Non-competitive pipelines have an industry standard annual price increase of PPI + 2.65%, which is generally superior to other long-term lease rates.

MLPs are partnerships, so they do not pay corporate income taxes. The tax liability of the MLP is passed on to its unit holders. Each investor receives a K-1 statement that details his or her 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 but which will reduce the cost-basis 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.