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 with public equities. Most MLPs are publicly traded oil and gas pipeline businesses that earn stable income from the transport of oil, gasoline and natural gas.
Many oil and gas 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 MLPs.
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.
Below are the recent performance rates and present yield for seven MLPs that are traded within the United States and that have market capitalizations of at least $5 billion and yields of at least 4 percent, or over double the 10-year U.S. Treasury rate: Energy Transfer Equity LP (NYSE:ETE), Energy Transfer Partners LP (NYSE:ETP), Enterprise Products Partners LP (NYSE:EPD), Kinder Morgan Energy Partners LP (NYSE:KMP), Magellan Midstream Partners LP (NYSE:MMP), ONEOK Partners LP (NYSE:OKS) and Williams Partners LP (NYSE:WPZ)
(Click charts to enlarge)
And below is a 1-year comparison chart:
2011 was a broadly positive year for this group of MLPs, with a few exceptions. The seven companies averaged 17.28% equity appreciation and a 5.6% distribution yield within 2011, which would combine to equal just under 23% appreciation. This compares with approximately 6.12% appreciation for the DJIA and less than 1percent appreciation for the S&P 500 (NYSEARCA:SPY), with both index options offering less than half the average yield.
Most of these MLPs entered 2012 with some strong performance, as both individuals and institutions continue to initiate and increase allocations into the asset class. There was some broad selling this week, but all of these MLPs are still up over the last month. MLPs were weighed down during the third quarter of 2011, as concerns over demand hit the market. Nonetheless, and once winter started, many of these demand concerns began to dissipate.
MLPs do often sell off when oil goes down even where the business itself is not necessarily hurt by the commodity drop. Certain MLPs that are more involved with exploration rather than transportation 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 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 usually then taxed at the investor's individual tax rate. These distributions may also reduce one's cost basis.
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.