Recent Performance Review Of 5 High-Yield Small-Cap MLPs

by: Zvi Bar

Master Limited Partnerships, or MLPs, are partnerships that are publicly traded on a securities exchange. MLPs combine the tax structure of limited partnerships with the liquidity of publicly traded securities, and tend to provide distributions at an above-average yield. Most MLPs are publicly traded oil and gas pipeline businesses that earn stable income from the transport of oil, gasoline and/or natural gas.

In the low interest rate environment that has existed for the last several years, MLPs have become a popular long-term income oriented investment allocation and also a popular business structure for holding certain energy related assets. Several MLPs have come under pressure over the last few months. Some of this recent underperformance may be related to profit taking, while concerns over increasing interest rates may also persuading investors to refrain from allocating such fixed income alternatives.

Nonetheless, given the strong growing appreciation for the MLP business model by both energy investors and businesses holding energy assets, it is likely that the asset class will grow. Moreover, it is likely that a growing number of funds and ETFs will come to focus on MLPs.

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 (NASDAQ:CLMT), Ferrellgas Partners LP (NYSE: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

Pipeline MLPs generally derive their revenue through on the amount of product transported, with minimal sensitivity to energy price fluctuations except to the extent that they affect energy demand. Not all oil and gas MLPs are pipelines, though. Several, especially among the small-caps are exploration and production companies that extract petroleum. Additionally, there are other specialized energy MLPs, such as businesses store energy for seasonal demand increases, as well as those deal with specific refined products such as propane, a byproduct of natural gas processing and petroleum refining.

So far this year, Ferrellgas Partners is considerably underperforming the other listed MLPs, down 18.98 percent. Ferrellgas is a propane distributor, and propane prices have been under similar pressure to natural gas. The best performing listed equity is Calumet partners, a refiner of specialty petroleum products, which has appreciated 32.49 percent so far this year.

See the 2012-to-date performance comparison chart for the above-listed MLPs:

Click to enlarge

These two significantly diverging performances demonstrate that not all MLPs are pipelines and that such non-pipeline MLPs, especially among the smaller ones, can be exceptionally volatile. The other three have maintained a far closer trading range.

These five MLPs now average a 9.54 percent annual payout. It is very possible that some of the MLPs with significant gas exposure will be compelled to reduce their yield within the coming months or quarters. It appears that investors are fearful of FGP's distribution rate, and that this may be contributing to its significant underperformance, but it is also worth noting that multiple insiders have made purchases within 2012.

Since MLPs do not pay corporate income taxes, the tax liability of the MLP is passed on to its equity owners. Each investor receives a K-1 statement that details their portion 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.

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.