2011 Performance Review For 5 Small Cap MLPs Yielding Over 8%

by: Zvi Bar

A Master Limited Partnership or 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.

MLPs usually provide their investors, the limited partners, with distributions that 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 income producing investment. Below are the 2011 equity performance rates and present yields for five small-cap MLPs that currently yield over eight percent: Breitburn Energy Partners L.P. (BBEP), Calumet Specialty Products Partners LP (CLMT), Ferrellgas Partners LP (FGP), Martin Midstream Partners LP (MMLP) and MV Oil Trust (MVO). Click to enlarge.

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Though many of the larger MLPs had positive years, this group of higher yield small-cap MLPs did not fare as well. Nonetheless, if distributions are included, these smaller MLPs are near flat for 2011. MLPs do often sell off when oil goes down even where the business may not necessarily be hurt by the drop. Certain MLPs that are more exploratory are more sensitive to oil price, while the purer pipelines could see increased demand at lower prices.

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.