Recent Performance Review Of 7 Oil And Gas MLPs And Royalty Trusts Yielding Over 8%

by: Zvi Bar

When it comes to getting an extremely high yield out of an equity, those equities are often not standard corporations, but instead another class of entity that is designed to provide a significant payout to investors. Within the world of oil and gas, there are two common forms of such high-income entities: the Master Limited Partnership and the Royalty Trust.

A Master Limited Partnership, or MLP, is a type of partnership that is publicly traded on a securities exchange, and most MLPs are publicly traded oil and gas pipeline businesses that earn stable income from the transport of oil, gasoline and/or natural gas. MLPs combine the tax structure of limited partnerships with the liquidity of publicly traded securities.

A royalty trust is a type of corporation that is also usually involved in oil and gas production or some type of natural resource mining. Royalty trust profits are not taxed at the corporate level so long as the bulk of the trust's profits (at least 90%) are distributed to shareholders as dividends.

Royalty trusts often own multiple individual claims, but in the U.S., trusts are not allowed to acquire additional properties once they are formed. This is very different from the MLP model, where new assets are often dropped into an already existing MLP. Another primary difference is that MLPs are usually involved in the distribution, while royalty trusts are usually involved in the extraction of the resources from a proven source. Therefore, most MLP yields should be consistent and based upon demand for oil and/or gas, while royalty trusts are usually more affected by commodity pricing and the ability of the actual entity to extract the resources.

In this now highly volatile environment, many may consider these high yield oil & gas options as a sensible long-term income producing investment. Below are the equity performance rates and current yields for four MLPs, Breitburn Energy Partners L.P. (BBEP), Calumet Specialty Products Partners LP (NASDAQ:CLMT), Ferrellgas Partners LP (NYSE:FGP), Martin Midstream Partners LP (NASDAQ:MMLP), and three royalty trusts BP Prudhoe Bay Royalty Trust (NYSE:BPT), MV Oil Trust (NYSE:MVO) and San Juan Basin Royalty Trust (NYSE:SJT). All of these equities are publicly traded in the United States and currently yield at least eight percent.

See the chart, indicating their five-day, 2012-to-date, three-month and six-month performance rates, as well as their current yields (click to enlarge):

Several of these high-yield options performed poorly in 2011, and all of the listed MLPs and trusts have depreciated over the last six months, with an average six-month equity depreciation of 10.33 percent. Within 2012 SJT has performed remarkably poorly compared with the broader group, dropping nearly 20 percent. As a consequence, its yield increased from the mid 6s up to the mid 8s. Though a distant second, the FGP has also depreciated by a significant 8.42 percent so far in 2012.

Some of the SJT and FGP depreciation seems caused by the continuing price weakness of natural gas, but their decline also appears linked to the cancellation of the Keystone pipeline extension. In the last week, SJT has dropping over 17 percent, on no other news. Many investors may also be speculating that a distribution cut is forthcoming based upon weakening natural gas prices. It is also conceivable that a significant holder is liquidating the position.

The royalty trusts have considerably more direct exposure to oil and gas prices, while the MLPs are more directly connected to demand for them. MLPs have developed a great deal of popularity over the last few years, and it is likely that the asset class will continue to grow over the next few years, as a growing segment of pension and retirement investments are allocated into the industry. Royalty trusts cannot grow individually, but it is likely that new trusts will be developed as property owners continue to develop more tax-efficient methods of monetizing oil and gas production.

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.