A Master Limited Partnership, or MLP, is a type of partnership that is publicly traded through a securities exchange. MLPs combine the tax structure of limited partnerships with the liquidity of publicly traded securities. Usually a private partnership is rather illiquid when compared to a public MLP.
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 pipeline MLPs can grow at a rate at or ahead of inflation.
Most MLPs involve oil and gas, either as pipeline businesses that earn stable income from the transport of oil, gasoline and natural gas, or as exploration and production partnerships. Oil and gas pipeline MLP revenue is based on the amount of product transported, and not on the price of oil or gas. As a result, pipeline MLPs shouldn't be highly sensitive to price fluctuations, except where they are significant enough to affect demand. Conversely, the exploration and production companies will be highly sensitive to oil and gas commodity price changes, as well as their own productivity.
Below are the recent performance rates and present yield for seven MLPs that are traded within the United States with market capitalizations of at least $5 billion and yields of at least 4%: 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).
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2011 was a broadly positive year for most of the larger pipeline MLPs, with a few exceptions. These seven companies averaged 17.28% equity appreciation and a 5.6% distribution yield in 2011, or about 23 percent appreciation. Nonetheless, these MLPs are underperforming the broader market so far in 2012. Since the start of the year, these seven MLPs are only up 2.6 percent, while the S&P 500 is up 15.36 percent.
MLPs 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 can be highly sensitive to oil price. Pipelines may be transporting different forms of petroleum such as oil, natural gas and liquefied gas, each with their own supply and demand issues.
Additionally, because so many individuals allocate into MLPs for the yield, MLPs may sometimes be affected by fixed income yield fluctuations. The recent concerns over potential spiking of US interest rates could make pipeline yields less appealing.
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.