Recent Performance Review Of 5 High Yield Small-Cap MLPs

by: Zvi Bar

A Master Limited Partnership, or MLP, is a kind of business partnership that is publicly traded on a securities exchange. MLPs combine the often preferred tax structure of limited partnerships with the increased liquidity of publicly traded securities. Usually, comparatively, private partnerships are relatively illiquid.

In the recent and continuing low interest rate environment, many have chosen MLPs as a long-term income oriented investment allocation that supplements a lack of yield in fixed income. 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 pipeline MLPs derive their revenue through on the amount of product transported and are not sensitive to price fluctuations except where they affect demand. Therefore, for example, a natural gas pipeline could benefit from continuing low natural gas prices, if demand increases as a result.

MLPs usually provide their investors, the limited partners, with distributions that are similar to dividends, but are 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, as well as continued business expansion.

Not all oil and gas MLPs own pipelines. Some extract petroleum, while others store it, and there are also MLPs that specialize in specific sub-categories such as propane, which is produced as a byproduct of natural gas processing and petroleum refining.

Below are recent equity performance rates for five high-yield, small cap MLPs that are publicly traded in the United States: Breitburn Energy Partners L.P. (BBEP), Calumet Specialty Products Partners LP (CLMT), Ferrellgas Partners LP (FGP), Martin Midstream Partners LP (MMLP) and Pioneer Southwest Energy Partners (PSE). I have provided 1-month, 2012-to-date and 1-year equity performance rates, as well as the current annualized yield each MLP distributes.Click to enlarge

Three of the above-listed MLPs are essentially flat so far in 2012. BBEP, MMLP and PSE are all within a few percent, or less, of where they started the year. Calumet, a refiner and maker of specialty distillates and other products, is the best performing equity over the 1-month, YTD and 1-year time-frames.

Ferrellgas, a propane distributor, declined 21.19 percent so far this year, and mostly within the last month. Like natural gas, propane prices have been under weakness recently, and Ferrellgas has lost 42.5 percent of its market value over the last year.

Since MLPs are partnerships, 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. Partnership income is then taxed at the investor's individual tax rate.

MLPs sometimes make cash distributions that are not taxed when received, but that will reduce the cost basis and create a tax liability that is deferred until the MLP is sold. Additionally, MLPs may distribute unrelated business taxable income. Such UBTI could be subject to taxation and require a special tax filing even when held in an IRA, if the UBTI exceeds $1,000 in a year.

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.