My first article for Seeking Alpha, "Why Buy MLPs?", was published September 5, 2008, just prior to the financial meltdown which dragged the stock market into depths that were hard to understand. At that time, the Alerian MLP Index had been drifting lower to 261 from a high of 342 in 2007. Despite this decline, I described MLPs as excellent long term investments because they invest in fixed assets in demand by the growing energy industry in the US and Canada. The articled opened with:
"Master Limited Partnerships (MLPs) are a new type of investment with an excellent record of high rates of stable growth and mostly tax-free (until the ultimate sale) high yields. Master Limited "Partnerships are a new type of investment with an excellent record of high rates of stable growth and mostly tax-free (until the ultimate sale) high yields."
Then came market collapse. The MLP index plunged to 152 with a 15.3% yield in November 2008. After an attempted rebound, it fell back to 167 in March 2009. When the stock market roared back, MLPs led the recovery. It rose to 411 before settling back to 363 currently. Formerly, MLPs were known for having low betas with limited ups and downs. Not any more.
Even after those gyrations, the basics for MLPs remain in place. MLPs supply energy infrastructure, primarily for gas and oil. Both industries are growing rapidly in the US. Besides providing support for energy projects, in recent years they began investing heavily in shale related projects. The growth in energy from shale is best demonstrated in North Dakota where increased oil production will make it the second largest state supplying oil in the US (Texas is #1).
Investing in MLPs is different than investing in stocks. They are limited partnerships: ownership is measured in units which pay distributions (not dividends). Tax treatment of distributions is favorable, only a small portion is taxed in the current year. But tax reporting is not simple and significant record keeping is required while the units are held. MLP yields are high (the MLP index yield is 6.7%) which is attractive for investors willing to accept tax complications.
I favor 2 major MLPs, each has a companion company which is a corporation that issues shares. They pay stock dividends based on the distributions paid to unit holders, attractive for those who want to avoid tax hassle.
Kinder Morgan (KMP) has become the largest MLP after acquiring El Paso last month. The system operates 80,000 miles of pipelines and 180 terminals. It transports natural gas, gasoline and crude oil in the Midwest, the Rocky Mountains and Texas and with the EP network from the Gulf Coast to New England, and in the west through Arizona, California, New Mexico and Nevada.
Its companion company is Kinder Morgan Management (KMR), a corporation paying stock dividends. Kinder Morgan Inc (KMI), is the general manager running the overall business. Its IPO was last year, so it has a limited record of dividend growth.
Enbridge Energy Partners (EEP) has 2 main businesses: the Liquids Segment for crude oil transportation (about 2/3 of the total) and the Natural Gas Segment with storage and natural gas midstream services (the remaining 1/3). EEP transports crude oil and natural gas liquids through the world's longest petroleum pipeline from western Canada to refining centers in the Midwest and on to Ontario, Canada. The Natural Gas Segment transports and markets gas in the Mid-Continent and Gulf Coast regions of the US.
Enbridge Energy Management (EEQ) is the companion corporation (with stock that pays stock dividends) that manages the business. Enbridge Inc (ENB), a major energy company based in Calgary, Alberta, owns about a quarter of the partnership and is the general partner.
MLP valuations are based on distributions, distribution records and the valuation placed on that income. Both companies have excellent records with no reductions. KMP distributions rose from 94 cents in 1997 to $4.80 presently. EEP distributions rose from $1.18 in 1993 to $2.13 presently. Both are guiding higher distributions for 2012 and beyond.
After outperforming popular stock averages for almost 3 years, MLPs are lagging behind in 2012. Lower prices raise yields for the index (which fell to 5.8% at its record high for the MLP index), bringing more value for security buyers. My article concluded:
"MLPs have excellent track records with relatively mild price fluctuations around their growth trend line, high yields (largely tax deferred) with excellent prospects for rapid growth going forward from strong demand for more oil and gas pipelines. These prospects have attracted many investors and this investment should gain popularity in the future."
Investors who bought MLPs 4 years ago (before the major portion of the crash) have done well, even though the immediate results tested their resolve. These securities should continue to give excellent long term results while providing current income to provide a degree of comfort during difficult times (like this year).
Enbridge Energy Partners
Enbridge Energy Mgmt
Kinder Morgan, Inc
Kinder Morgan Partners
Kinder Morgan Mgmt
Disclosure: I am long EEQ.