MLPs provide investors, the limited partners, with distributions that are similar to dividends, but which are taxed differently. Most energy MLP analysts estimate that the distribution growth of pipeline MLPs can grow at a rate at or ahead of inflation.
Many MLPs declined over the last few months, as traders have cycled out of certain energy and yield-based allocations, but it appears that the group may be on the mend. Like utilities, most MLPs have traded based primarily on their yield, making share prices susceptible to interest rate changes.
Most MLPs involve oil and gas, and usually as pipeline businesses that earn relatively stable income from the transport fees for oil, gasoline and natural gas. Oil and gas pipeline MLP revenue is primarily based on the amount of product transported, and not on the price at which it sells, though there is some price exposure. Additionally, sometimes price changes are significant enough to affect demand in a manner that could be either good or bad for a pipeline. Conversely, exploration and production MLPs are highly sensitive to commodity price changes, and their own individual production rates.
Below are the recent performance rates and present yield for five MLPs that are traded within the United States with market capitalizations of at least $10 billion and yields of at least 4.5 percent: Energy Transfer Partners LP (ETP), Enterprise Products Partners LP (EPD), Kinder Morgan Energy Partners LP (KMP), ONEOK Partners LP (OKS) and Williams Partners LP (WPZ).
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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 U.S. interest rates could make some yields less appealing. A significant increase in the risk free rate of return would not bode well for this asset class, which has made its mark as an income supplement and alternative in a low interest rate market.
So far this year, most of these MLPs have underperformed the broader market, as investors have lessened their allocations in high yield options and energy-related investments. Nonetheless, these MLPs have performed better than the benchmarks over the last month, as investors have again sought out higher yielding investments that are not highly correlated to broader market.
Certain MLPs that are more involved with exploration rather than transportation are often highly sensitive to oil price. Sometimes, pipeline MLPs sell off when oil or gas spikes down, even where the business itself is not necessarily affected by the commodity price so much as by demand for it. Some pipeline contracts are sensitive to commodity prices, though a substantial amount are a strict pipeline toll that grows at predetermined rates, much like a long term commercial lease.
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.
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.