Thanks for the follow-up comments. I did not intend for my earlier reply to seem unfriendly.
I agree that most of the time UBTI may not be a major issue as certainly not all of income you receive from an MLP is considered UBTI. It is also definitely true that it's the trustee's responsibility to file a form 990T.
However, I have read several reports that suggest that the UBTI is added up across all MLPs owned. In particular, check out IRS Publication 598. This publication discusses tax-exempt organizations that is specifically stated to include IRAs. Each organization is required to report income from all its unrelated businesses on a single 990T. Here's the link to that publication: www.irs.gov/pub/irs-pd...
Also, check out several of the MLP guides posted on the NAPTP's own website at naptp.org.
On Oct 22 05:08 PM Smackdown wrote:
> I just got off the phone with investor relations of a large MLP. > They indeed confirmed that I am correct and that the UBTI does not > net out across multiple holdings. It is MLP specific. For example, > you own 10 MLPS in an IRA that each have $900 in UBTI. It is not > added up. No tax is due. > > Hope this helps.
Thanks for the comment. But a couple of points are worth noting:
1. UBTI allowance of $1k is not per MLP but cumulative. Whether or not you exceed that limit depends on how large your holdings are.
2. It's true that a good investment is a good investment and most individual investors focus too much attention on taxes relative to just picking good stocks. But, the question/choice you propose in your comment isn't the question I was asked.
The choice I was responding to in my prior comment wasn't whether someone should buy MLPs in an IRA or not at all. It was whether MLPs should be purchased in an IRA or in a taxable account. If you have the choice of playing them in a taxable account that would be preferable in my view.
If you do want to hold some in an IRA, the names I mentioned are simply a way of avoiding UBTI issues at all. In addition KMR and EEQ might make sense in an IRA where monies are going to be held for a long period of time as these i-units are somewhat akin to a distribution reinvestment plan.
On Oct 22 11:48 AM Smackdown wrote:
> Elliott, I have to strongly disagree with you. UBTI is seldom > an issue in IRA accounts. Most MLPs do not generate enough UBTI > to cause an issue. I do believe the $1000 limit is per MLP and > not cumulative. In addition, UBTI is not the distribution as many > incorrectly assume. In conclusion, the IRA trustee is responsible > for the UBTI excise if any so it is not the investors concern.<br/> > > Your second point is totally off the mark. A good investment is > a good investment. Period. Alerian MLP index is up almost sevenfold > in 13 years. If I avoided MLPS in IRA accounts because they are > "not suitable due to some tax advantage", I pissed away one of the > best sector opportunities, bar none. The tax advantage is icing > and not any reason to avoid them. > > Question... Which would you buy in an IRA if limited to these two > choices. 1 year corporate investment grade paper at 1.4% or 1 > year muni paper with higher ratings and 1.5%? Even though the > muni is tax free, it still nets more. For the record, I would > not buy either, but you get the point.... ;)
Yes, generally you are better owning MLPs in a taxable account. One reason is UBTI, the other is simply it's best not to put a tax-advantaged investment in a tax-free account as you lose the benefit.
There are three ways around the issue. One is to buy a closed-end MLP fund; these funds report dividends on a normal 1099 so you have no UBTI issue. They also offer nice yields that are tax-advantaged in an IRA account.
Second, you can buy what's known as an i-unit. These are issued by MLPs but pay distributions in the form of additional units (the MLP equivalent of shares) rather than cash. Also, not subject to UBTI. There are only two publicly traded i-units, KMR and EEQ.
Third, there are some MLPs that are actually based overseas and have elected to be taxed as a corporation for US tax purposes. Therefore, they report on a 1099. Because they have no US assets, they're not subject to any tax so this is just a technicality. An example would by NMM.
On Oct 21 03:13 PM oldman wrote:
> I'm hesitiant to buy MLP's for my retirement accounts as I know I > might end up with UBTI and a K-1 for the IRA. also, I think there > are tax benefits I can't use although the yield is good and what's > the difference if I can't use tax benefits? I'd appreciate your comments > on these issues. Would certain MLP's be better, if at all, for my > IRA? > > Thanks for the article.
Thanks, that's actually a complex question. The first point to note is that WMB isn't really a pure-play GP though it does control the GP of WPZ.
There are some publicly traded pure-play GPs out there. (To add to the complexity, the publicly traded GPs are actually structured as LPs for tax purposes). An example of a publicly traded GP would be Enterprise GP Holdings (NYSE: EPE), the GP for Enterprise Products partners (NYSE: EPD). EPE receives IDRs from Enterprise therefore its cash flows are derived from the IDR structure I outlined above and indirectly from EPD's distributions. To make a long story short, you will find that the yield on most publicly traded GPs is lower than for their LPs but the potential growth rate in distributions is higher -- the GPs are more or less a leveraged play on distribution growth.
To answer your question specifically about WMB. WMB is primarily an exploration and production company. The types of assets it targets would be fields where it can produce production growth. This isn't really appropriate for the MLP structure because what you want with MLPs isn't high growth but steady cash flows that can back up big distributions.
The types of assets in WPZ are much slower-growing -- WMB's slower-growing cash cow assets. They're not interesting from a growth perspective but they can be from an income sustainability angle.
The MLP structure effectively allows WMB to focus on attracting growth investors while it carves out assets that appeal to more income-oriented players. Whether you find WMB or WPZ more interesting would depend entirely on whether your looking for capital gains or cash income.
On Oct 21 09:26 AM J. Stack wrote:
> Elliot, thanks for an easy to understand article; however, when I > started to read, I assumed you were going to explain why an investor > would choose either a GP or the LP. For instance, as I am 76 years > old, I am interested in dividend income. > In the case of WMB, the yield is 2.2% vs. WPZ which distributes about > 10%. Question: why would anyone looking for income choose the GP > with the lower yield?
Most people who think alternative energy is the solution to all the world's problems ignore scale. It is a similar misconception to those that believe Tiber and other deepwater fields will mean we can see rising oil production.
The media has made much of China’s decision to build a 2GW solar power plant, the largest and most ambitious plant ever built anywhere in the world. China signed a memorandum of understanding with First Solar (NSDQ: FSLR) to build the plant in Mongolia. The first stage, slated to get underway next June, would be for a 30 megawatt demonstration plant. Phase two would add another 100 megawatts of capacity, while the third stage would further expand this capacity by 870 megawatts. The first three stages of the project are expected to be completed around 2014. The final stage of the project would be completed in 2019 and would add another gigawatt of capacity.
This is an impressive project that will generate significant revenues for First Solar and could provide a useful proof of concept for China and other countries looking to build out solar capacity. But let’s slice through the hype and take a look at what it all really means. According to the EIA, China’s total generating capacity in 2007 was 624 GW. In the year 2007 alone, China added more than 105 GW to its capacity and this year the nation could add 80GW. In light of those figures, a 2 GW solar plant that will take a decade to complete sounds somewhat less impressive.
For China coal is the real workhorse. Of the 105 gigawatts added to China’s capacity in 2007, conventional thermal power plants accounted for 96 gigawatts and about 90 percent of that capacity was coal-fired. Coal isn’t dead, and it’s ridiculous to assume it can be replaced by alternatives in any reasonable time frame.
On Oct 19 11:39 AM Emerald wrote:
> Oil will not be replaced by alternatives (solar, wind, electric) > in the next 20-30 years. Perhaps alternatives will reach 10-15% twenty > years frim now but gasoline will be powering cars for a long time. > Batteries have promise but it is limited near term.
Contract drillers are the group that is most often cited as a play on deepwater followed by producers with heavy concentration in the deep. Both are legitimate plays but I think there are more leveraged ways to go.
The big contract drillers with deepwater rigs (such as RIG) contract their rigs years into the future at day-rates that are fixed or nearly fixed. The good news: their revenues are basically locked in by these contracts so in weak markets, they shouldn't be impacted. The bad news: when day-rates rise, these contract drillers really have little near-term leverage to rising rates because they've already contracted their rigs.
In addition to the drillers/producers, you might want to take a closer look at services and equipment firms. Services companies are probably the most direct play on the end of easy oil thesis I outlined above -- complex fields such as in the G. Triangle are just more profitable than onshore fields for companies like Schlumberger.
As for equipment, check out subsea equipment firms like FMC Technologies (FTI) . Also, some of the high-end tubular goods companies are a play as you need advanced pipes to handle extreme pressures and temperatures in deepwater.
On Oct 18 08:47 PM fireball wrote:
> elliot > i'm looking at rig and atwood. any thoughts? any better for deepwater?
Thanks for the kind words. And, you're absolutely correct about the maths behind these plays. I don't want to give the impression that there is a glut of oil coming from these deepwater plays; rather, growing production from these assets will help offset declines elsewhere.
The media tends to focus on the size of these fields in terms of total barrels of oil in place or total reserves. As I wrote in an earlier article on Seeking Alpha, what really matters is the amount of production to flow from these fields. For example, BP announced the discovery of Tiber in the Gulf of Mexico a few weeks ago and hinted it could contain more than 3 billion barrels of oil. The headlines screamed that Tiber contained a year's worth of Saudi Arabian production. The reality: Tiber may yield 200,000 bbl/day of production a decade from now. That's a drop in the bucket when you consider global oil consumption of 83 million bbl/day.
Another key point to keep in mind is that as global production of "easy" oil is replaced by "hard" oil, prices will need to remain relatively elevated to incentive the necessary investment. Somewhat paradoxically, I would say that as we discover more oil in these deepwater plays that spells higher, not lower crude oil prices.
On Oct 18 09:51 AM Ferdinand E. Banks wrote:
> This is a very interesting article, and it deserves a thorough reading, > but I think that I will wait until I do my calculating. I'm not at > all sure that these 'golden triangle' assets will give us as much > oil as we might need a few years after the present macroeconoic troubles > are over.
Natural Gas Currently Offers the Best Near-Term Investment Opportunity [View article]
You will find different cost estimates for the breakeven level required in various gas fields. Ultra Pete. (NYSE: UPL) published a nice summary chart in the slides pertaining to its most recent quarterly call of what it takes for operators to earn a 10 percent rate of return from various plays around the country.
According to that data, no major plays in the US offer an economic return under $3.50/MMBTU. Some of the best major shale gas plays from a cost standpoint are the Haynesville (Louisiana core) and the Fayetteville which require prices of $3.50 and $3.70 respectively. Marcellus also comes in at $3.90 while the Tier 1 Barnett is at $4.20.
This helps to explain why we actually saw production from Louisiana rise in the most recent EIA-914 -- producers are focusing their attention on plays that are economic at low gas prices such as Haynesville.
But, watch Texas production very carefully. TX is the largest producing State and in July produced nearly 5 times what Louisiana did. Part of that production comes from the Barnett Shale and other unconventional plays but a big chunk also comes from higher cost conventional wells which have seen a huge drop-off in activity over the past year. TX production has fallen for four consecutive months, a total of nearly 1 bcf/day.
An up-tick in production from the cheapest unconventional plays is not enough to offset declines in production from conventional and more expensive shale plays.
As for consumption, the key figure to watch is industrial consumption as that's where most of the gas demand destruction has come from. At one point this year, industrial demand was off 15 percent year-over-year while it's now down about 10 percent year-over-year, a notable slowdown in the pace of year-over-year declines.
Industrial gas demand did pick up in July as compared to June levels. It's unclear if that's just a blip or the beginning of a trend; however, the improvement in US economic and manufacturing data suggest we should see that continue into August and September.
On Oct 06 04:19 PM Ron2008 wrote:
> "Meanwhile, US natural gas production is plummeting due to the lack > of drilling activity; producers need to see prices rally back over > USD6 per MMBtu to start drilling and stem these production declines." > > > Are you sure about that? I don't see any sources for that price. > But I did find this. > > Producers in the Eagle Ford can break even when natural gas is priced > as low as $3.88 per million British thermal units, the firm said, > versus break-even prices of $5.18 in the Barnett, $3.74 in the Marcellus > and $4.49 in the Haynesville. > www.chron.com/disp/sto... > > > Here's more data on consumption that is opposite of what you said. > > > Consumption will fall by 2.4 percent this year and remain flat in > 2010, according to the Energy Information Administration
Climate Change, Energy and Manufacturing [View article]
Solar power will definitely see growth in coming years and I do like First Solar as a play on the story but the main driver of growth is government subsidy.
Solar is far from a practical technology or a solution to environmental concerns and the need to supply more power in developing countries to meet demand. The reality is mainly hype: solar will not amount to a significant percentage of energy generation in the US or any major economies for decades, if ever.
The media has made much of China’s decision to build a 2GW solar power plant, the largest and most ambitious plant ever built anywhere in the world. China signed a memorandum of understanding with First Solar (NSDQ: FSLR) to build the plant in Mongolia. The first stage, slated to get underway next June, would be for a 30 megawatt demonstration plant. Phase two would add another 100 megawatts of capacity, while the third stage would further expand this capacity by 870 megawatts. The first three stages of the project are expected to be completed around 2014. The final stage of the project would be completed in 2019 and would add another gigawatt of capacity.
This is an impressive project that will generate significant revenues for First Solar and could provide a useful proof of concept for China and other countries looking to build out solar capacity. But let’s slice through the hype and take a look at what it all really means. According to the EIA, China’s total generating capacity in 2007 was 624 GW. In the year 2007 alone, China added more than 105 GW to its capacity and this year the nation could add 80GW. In light of those figures, a 2 GW solar plant that will take a decade to complete sounds somewhat less impressive.
For China coal is the real workhorse. Of the 105 gigawatts added to China’s capacity in 2007, conventional thermal power plants accounted for 96 gigawatts and about 90 percent of that capacity was coal-fired. Coal isn’t dead, and it’s ridiculous to assume it can be replaced by alternatives in any reasonable time frame.
On Oct 06 01:56 PM Mad Hedge Fund Trader wrote:
> isc Solar is about to become a big part of our lives, as it careens > toward long sought profitability, and it will suit you to learn more > about it. To get a good introduction to the industry, both through > some good engineering statistics and some great pictures, then check > out the September edition of National Geographic magazine by clicking > here . Total world electricity demand today is 16 terawatts (16,000 > megawatts), and that is expected to grow to 20 terawatts by 2020. > Solar comes in two flavors, thermal and photovoltaic (seekingalpha.com/symbo...). > Thermal is the old dinosaur technology, with thousands of convex > mirrors arrayed to heat piped oil, which is then used to power a > conventional steam power plan, converting about 24% of the sun’s > energy into electricity. The future is with photovoltaic solar, which > uses the semiconducting ability of silicon to grab electrons directly > from sunlight. PV is less efficient at a 10% conversion rate, more > expensive, but is making great leaps forward. It would only take > 100 square miles of PV panels placed on rooftops to meet all of the > electricity demands of the US. The final goal is to develop silicon > paint which you then apply to your house to generate power, all for > the cost of a bucket of regular paint. PV chips in the lab are already > achieving efficiencies of 40%. First Solar (seekingalpha.com/symbo...) > now owns the cutting edge with its thin film panels, a company I > have written about extensively (click here for the report ). It is > also a great trading vehicle, with plenty of volatility, and the > recent silicon panel price war with China has knocked the stock down > into “buy” territory. The additional of FSLR to the S&P 500, > the first alternative stock to do so, is the writing on the wall. > I regularly mine this magazine for long term technology and environmental > trends, and my kids love cutting up the pictures. After all, it was > founded by one of the original venture capitalists, Alexander Graham > Bell, the inventor of the telephone.
Railroad Indicator: On Track for Recovery [View article]
You are quite correct. I do look at container port statistics such as the stats released by the Port of Long Beach, California. These stats reveal similar basic trends.
For example, total loaded containers (import and export but excluding empties) handled by the Port fell 43 percent from October 2008 to February 2009. Some of this was a normal seasonal slowdown after New Year but typically the decline is on the order of 10 percent, not 43 percent.
Volumes jumped to 380,000 20-foot equivalent units (TEUs) in August, the highest since last October. The bounce back in both import and export TEUs has been tremendous since February though it's still down slightly from year-ago levels. If trends persist we should see TEU's jump back over 400,000. Looking at historical data going back to 1995, that level of activity would be considered brisk.
On Sep 22 10:19 AM Transportation Guy wrote:
> Undoubtedly traditional railcar loadings are an excellent LEI. Even > the oracle of Omaha is on board with them in a big way. For the consumer > side of things one needs to be in tune with international intermodal > loadings, specifically the container import figures as they indicate > "big box" stores supply chain replenishment, hence consumer demand. > Watch US port activities as they relate to imported containers and > then the railroad intermodal reports of ISO containers being handled > on their respective systems.
Tiber Oilfield Spells Major Upside for Prices [View article]
I like Transocean (RIG) generally as well as some of the other deepwater-focused drillers. However, I believe focusing solely on the deepwater contract drillers as a play on accelerating deepwater spending and Tiber is a mistake.
For one thing, most deepwater rigs are contracted for years into the future at fixed or gradually adjusting indexed day-rates and thus see little or no near-term benefit from a particular discovery or jump in demand. For example, the rig you highlight is contracted to BP through October of 2010. RIG has a total of 18 ultra-deepwater floaters but a quick glance at their latest fleet status report shows that most are already committed. Three of those 18 are available for re-contracting next year, 5 in 2011, 2 in 2012 and the remainder after that. While this provides predictability of cash flow and earnings visibility it means that RIG only sees upside gradually from rising deepwater interest and demand.
If you're looking for a more direct play on accelerating deepwater development one area to keep an eye on would be subsea equipment producers like FMC Tech (FTI) or Cooper Cameron (CAM)
On Sep 08 08:23 PM William M. Wright wrote:
> Why are you recommending SLB on this find? Seems to me RIG is the > best play for this and other deepwater drilling. This huge pool of > oil is trapped 35,000 feet below the Gulf floor in a geological area > known as the Lower Tertiary trend. That's nearly a mile deeper than > Mount Everest is high ! > > Transocean Ltd. (NYSE:seekingalpha.com/symbo...) today announced > that its ultra-deepwater semisubmersible rig Deepwater Horizon recently > drilled the deepest oil and gas well ever while working for BP and > its > co-owners on the Tiber well in the U.S. Gulf of Mexico. Working with > BP, the Transocean crews on the Deepwater Horizon drilled the well > to 35,050 vertical depth and 35,055 feet measured depth or more than > six miles. > > So why recommend SLB when you should be recommending RIG???
Master Limited Partnerships for Your Portfolio: Three Key Questions and Answers [View article]
Thanks for all the great comments. You are quite right to point out that incentive distribution rights (IDRs) are an important consideration when investing in MLPs. I do think a few additional points are worth noting about MLP's GP/LP relationship.
First, I do think IDRs incentive the GP to act in the best interest of the LP holders. The reason is that IDRs are based on the amount of money paid out to LP holders -- the split with the GP increases only when the payout to LP holders rises. In most cases, the GP will totally forfeit any IDR if a certain minimum distribution isn't met.
Second, while you are absolutely correct about the high split set at 50% for most MLPs and 25% for EPD, the calculation is a bit more complex than straight multiplication so the actual percentage take is not as high as that. Rather than bore readers with a lengthy comment, I'll try to post a blog in future with the exact calculation details. For now, suffice it to offer an example: Enterprise Products has a high split of 25% but in the first quarter of this year, the company paid a distribution of 53.75 cents to LP holders and just 9.22 cents per unit to the GP.
Third, there are some alternative partnership structures that do not have a GP/LP relationship. An example is Linn Energy (NSDQ: LINE), a limited liability company (llc). Linn is taxed similarly but has no IDR structure.
Fourth, it is extremely important to look at exactly who the GP is for a particular MLP and how capable they are of supporting the partnership in bad times. For example, last autumn Richard Kinder who controls Kinder Morgan's (NYSE: KMP) GP stated that he and the GP would step up with additional cash needed to fund expansion if credit markets remained constrained. And some MLP GPs are actually energy firms with assets they can "drop-down" to the MLP when times are troubled to shore up cash flows. On the other side of the coin are GPs controlled by private equity firms that may be overly reliant on debt.
Fifth, you can actually play the other side of the IDR coin if you wish -- there are a handful of publicly traded GPs that are taxed like MLPs. Enterprise GP Holdings (NYSE: EPE), GP for Enterprise Products Partners, is one example.
On Aug 30 04:17 PM Uncle Pie wrote:
> When investing in MLPs, be aware of the "incentive distributions" > paid to the general partner. Most MLPs have a provision that once > the distribution per share rises above certain levels, the general > partner is entitled to a larger percentage of the cash flow. After > a certain point is reached, the "incentive distribution" often maxes > out with an extra 50% of the cash flow going to the general partner. > This is referred to as the "high splits". Some MLPs, to their credit, > have capped the incentive distribution at 25%. Enterprise Products, > EPD, referenced in the article, is an example of an MLP with a 25% > max. It's all in the prospectus, but you should know that when you > invest in a "high splits" MLP, you are basically putting up 100% > of the capital for 50% of the return. The author owns units of EPD > and several other MLPs. The author was pleased with the performance > of his MLP securities during the recent market meltdown relative > to many other holdings!
While the articles concerning $20 or $40 oil referenced in the comment above contain some interesting points, I would be willing to take the other side of that bet. I am looking for oil to top $100/bbl in 2010 and possibly even challenge those '08 highs in coming years.
Your comment makes a completely valid point. Basically, at $20 or $40, much of the world's production isn't economic. As global oil demand returns in coming months, the important point to consider is really what is the marginal cost of oil? In other words, what does it cost to bring an incremental barrel into production to meet demand. Reserves like the oil sands and perhaps deepwater would represent marginal barrels -- if production is to actually increase, exploiting these marginal barrels needs to be profitable.
In its recent conference call Schlumberger (NYSE: SLB) made some interesting comments in this regard. It seems that the company believes oil prices will need to be around $70 at year end if production firms are going to have enough confidence to increase their capital spending budgets. At $40 they'd slash CAPEX plans and global oil production would fall off quickly. And if oil prices look to be too volatile they may also be reluctant to boost CAPEX.
There is a very real risk that in 2010, the CAPEX cutbacks of late 2008, early 2009 will come home to roost in the form of falling production just as global demand re-accelerates. Then, you have the recipe for a real spike.
On Aug 27 02:52 PM Donald Ingram wrote:
> The US gets most of it's oil supply from Canada and most of that > comes from the oil sands where the cost of production is $60 to $70 > USD per barrel. In the event of a down turn in oil to as much as > $40 USD per barrel, the amount of oil exported to the US from Canada > would suffer cut backs from the oil sands, instigating a short term > shortage, which would then have the effect of driving up prices at > the pump.
You are quite right; however, I do think the dollar/oil link has been overplayed in the media.
After all, gold is often considered the ultimate currency. Certainly, it has been accepted as money for more than 1,000 years and, therefore, has more legitimacy than the paper we call the US dollar.
At the beginning of 2009, a barrel of oil (based on WTI spot) cost 0.0506 ounces of gold. Now, that same barrel costs 0.076949 ounces of gold. Not saying the dollar is meaningless, just saying that not all of oil's advance is the weak dollar, there are other forces at play.
On Aug 27 10:19 AM Steve in TN wrote:
> For residents of Europe the rise in oil prices is not nearly as steep > as in the U.S. Corrected by currency levels, the current price of > oil in Europe, in general, is around $61.
Thanks for the comment. The MLP structure was created as part of the Revenue Act of 1987, so they're alive and well.
While I agree that politics are always a wild card, the risk appears minimal at this time. After all, last year as part of the Emergency Economic Stabilization Act of 2008 (aka the Bailout), Congress actually expanded the MLP structure to allow these firms to handle renewable fuels. In addition, a recent Treasury report estimated that the total cost to the government is roughly $500 million -- a paltry sum when you consider the size of the US deficit.
In fact, it's possible Congress may view the structure as a way of encouraging investment in alternative/renewable energy.
On Aug 17 06:36 PM Prudent Man CFA wrote:
> Nothing like touting your own service and holding it out as objective > analysis. I thought MLPs died decades ago. With an anti-business > Administration I would be very careful of any promised tax advantages.
MLPs: GP / LP Relationship Is Key [View article]
I agree that most of the time UBTI may not be a major issue as certainly not all of income you receive from an MLP is considered UBTI. It is also definitely true that it's the trustee's responsibility to file a form 990T.
However, I have read several reports that suggest that the UBTI is added up across all MLPs owned. In particular, check out IRS Publication 598. This publication discusses tax-exempt organizations that is specifically stated to include IRAs. Each organization is required to report income from all its unrelated businesses on a single 990T. Here's the link to that publication:
www.irs.gov/pub/irs-pd...
Also, check out several of the MLP guides posted on the NAPTP's own website at naptp.org.
On Oct 22 05:08 PM Smackdown wrote:
> I just got off the phone with investor relations of a large MLP.
> They indeed confirmed that I am correct and that the UBTI does not
> net out across multiple holdings. It is MLP specific. For example,
> you own 10 MLPS in an IRA that each have $900 in UBTI. It is not
> added up. No tax is due.
>
> Hope this helps.
MLPs: GP / LP Relationship Is Key [View article]
1. UBTI allowance of $1k is not per MLP but cumulative. Whether or not you exceed that limit depends on how large your holdings are.
2. It's true that a good investment is a good investment and most individual investors focus too much attention on taxes relative to just picking good stocks. But, the question/choice you propose in your comment isn't the question I was asked.
The choice I was responding to in my prior comment wasn't whether someone should buy MLPs in an IRA or not at all. It was whether MLPs should be purchased in an IRA or in a taxable account. If you have the choice of playing them in a taxable account that would be preferable in my view.
If you do want to hold some in an IRA, the names I mentioned are simply a way of avoiding UBTI issues at all. In addition KMR and EEQ might make sense in an IRA where monies are going to be held for a long period of time as these i-units are somewhat akin to a distribution reinvestment plan.
On Oct 22 11:48 AM Smackdown wrote:
> Elliott, I have to strongly disagree with you. UBTI is seldom
> an issue in IRA accounts. Most MLPs do not generate enough UBTI
> to cause an issue. I do believe the $1000 limit is per MLP and
> not cumulative. In addition, UBTI is not the distribution as many
> incorrectly assume. In conclusion, the IRA trustee is responsible
> for the UBTI excise if any so it is not the investors concern.<br/>
>
> Your second point is totally off the mark. A good investment is
> a good investment. Period. Alerian MLP index is up almost sevenfold
> in 13 years. If I avoided MLPS in IRA accounts because they are
> "not suitable due to some tax advantage", I pissed away one of the
> best sector opportunities, bar none. The tax advantage is icing
> and not any reason to avoid them.
>
> Question... Which would you buy in an IRA if limited to these two
> choices. 1 year corporate investment grade paper at 1.4% or 1
> year muni paper with higher ratings and 1.5%? Even though the
> muni is tax free, it still nets more. For the record, I would
> not buy either, but you get the point.... ;)
MLPs: GP / LP Relationship Is Key [View article]
There are three ways around the issue. One is to buy a closed-end MLP fund; these funds report dividends on a normal 1099 so you have no UBTI issue. They also offer nice yields that are tax-advantaged in an IRA account.
Second, you can buy what's known as an i-unit. These are issued by MLPs but pay distributions in the form of additional units (the MLP equivalent of shares) rather than cash. Also, not subject to UBTI. There are only two publicly traded i-units, KMR and EEQ.
Third, there are some MLPs that are actually based overseas and have elected to be taxed as a corporation for US tax purposes. Therefore, they report on a 1099. Because they have no US assets, they're not subject to any tax so this is just a technicality. An example would by NMM.
On Oct 21 03:13 PM oldman wrote:
> I'm hesitiant to buy MLP's for my retirement accounts as I know I
> might end up with UBTI and a K-1 for the IRA. also, I think there
> are tax benefits I can't use although the yield is good and what's
> the difference if I can't use tax benefits? I'd appreciate your comments
> on these issues. Would certain MLP's be better, if at all, for my
> IRA?
>
> Thanks for the article.
MLPs: GP / LP Relationship Is Key [View article]
There are some publicly traded pure-play GPs out there. (To add to the complexity, the publicly traded GPs are actually structured as LPs for tax purposes). An example of a publicly traded GP would be Enterprise GP Holdings (NYSE: EPE), the GP for Enterprise Products partners (NYSE: EPD). EPE receives IDRs from Enterprise therefore its cash flows are derived from the IDR structure I outlined above and indirectly from EPD's distributions. To make a long story short, you will find that the yield on most publicly traded GPs is lower than for their LPs but the potential growth rate in distributions is higher -- the GPs are more or less a leveraged play on distribution growth.
To answer your question specifically about WMB. WMB is primarily an exploration and production company. The types of assets it targets would be fields where it can produce production growth. This isn't really appropriate for the MLP structure because what you want with MLPs isn't high growth but steady cash flows that can back up big distributions.
The types of assets in WPZ are much slower-growing -- WMB's slower-growing cash cow assets. They're not interesting from a growth perspective but they can be from an income sustainability angle.
The MLP structure effectively allows WMB to focus on attracting growth investors while it carves out assets that appeal to more income-oriented players. Whether you find WMB or WPZ more interesting would depend entirely on whether your looking for capital gains or cash income.
On Oct 21 09:26 AM J. Stack wrote:
> Elliot, thanks for an easy to understand article; however, when I
> started to read, I assumed you were going to explain why an investor
> would choose either a GP or the LP. For instance, as I am 76 years
> old, I am interested in dividend income.
> In the case of WMB, the yield is 2.2% vs. WPZ which distributes about
> 10%. Question: why would anyone looking for income choose the GP
> with the lower yield?
The End of 'Easy Oil' [View article]
The media has made much of China’s decision to build a 2GW solar power plant, the largest and most ambitious plant ever built anywhere in the world. China signed a memorandum of understanding with First Solar (NSDQ: FSLR) to build the plant in Mongolia. The first stage, slated to get underway next June, would be for a 30 megawatt demonstration plant. Phase two would add another 100 megawatts of capacity, while the third stage would further expand this capacity by 870 megawatts. The first three stages of the project are expected to be completed around 2014. The final stage of the project would be completed in 2019 and would add another gigawatt of capacity.
This is an impressive project that will generate significant revenues for First Solar and could provide a useful proof of concept for China and other countries looking to build out solar capacity. But let’s slice through the hype and take a look at what it all really means. According to the EIA, China’s total generating capacity in 2007 was 624 GW. In the year 2007 alone, China added more than 105 GW to its capacity and this year the nation could add 80GW. In light of those figures, a 2 GW solar plant that will take a decade to complete sounds somewhat less impressive.
For China coal is the real workhorse. Of the 105 gigawatts added to China’s capacity in 2007, conventional thermal power plants accounted for 96 gigawatts and about 90 percent of that capacity was coal-fired. Coal isn’t dead, and it’s ridiculous to assume it can be replaced by alternatives in any reasonable time frame.
On Oct 19 11:39 AM Emerald wrote:
> Oil will not be replaced by alternatives (solar, wind, electric)
> in the next 20-30 years. Perhaps alternatives will reach 10-15% twenty
> years frim now but gasoline will be powering cars for a long time.
> Batteries have promise but it is limited near term.
The End of 'Easy Oil' [View article]
The big contract drillers with deepwater rigs (such as RIG) contract their rigs years into the future at day-rates that are fixed or nearly fixed. The good news: their revenues are basically locked in by these contracts so in weak markets, they shouldn't be impacted. The bad news: when day-rates rise, these contract drillers really have little near-term leverage to rising rates because they've already contracted their rigs.
In addition to the drillers/producers, you might want to take a closer look at services and equipment firms. Services companies are probably the most direct play on the end of easy oil thesis I outlined above -- complex fields such as in the G. Triangle are just more profitable than onshore fields for companies like Schlumberger.
As for equipment, check out subsea equipment firms like FMC Technologies (FTI) . Also, some of the high-end tubular goods companies are a play as you need advanced pipes to handle extreme pressures and temperatures in deepwater.
On Oct 18 08:47 PM fireball wrote:
> elliot
> i'm looking at rig and atwood. any thoughts? any better for deepwater?
The End of 'Easy Oil' [View article]
The media tends to focus on the size of these fields in terms of total barrels of oil in place or total reserves. As I wrote in an earlier article on Seeking Alpha, what really matters is the amount of production to flow from these fields. For example, BP announced the discovery of Tiber in the Gulf of Mexico a few weeks ago and hinted it could contain more than 3 billion barrels of oil. The headlines screamed that Tiber contained a year's worth of Saudi Arabian production. The reality: Tiber may yield 200,000 bbl/day of production a decade from now. That's a drop in the bucket when you consider global oil consumption of 83 million bbl/day.
Another key point to keep in mind is that as global production of "easy" oil is replaced by "hard" oil, prices will need to remain relatively elevated to incentive the necessary investment. Somewhat paradoxically, I would say that as we discover more oil in these deepwater plays that spells higher, not lower crude oil prices.
On Oct 18 09:51 AM Ferdinand E. Banks wrote:
> This is a very interesting article, and it deserves a thorough reading,
> but I think that I will wait until I do my calculating. I'm not at
> all sure that these 'golden triangle' assets will give us as much
> oil as we might need a few years after the present macroeconoic troubles
> are over.
Natural Gas Currently Offers the Best Near-Term Investment Opportunity [View article]
According to that data, no major plays in the US offer an economic return under $3.50/MMBTU. Some of the best major shale gas plays from a cost standpoint are the Haynesville (Louisiana core) and the Fayetteville which require prices of $3.50 and $3.70 respectively. Marcellus also comes in at $3.90 while the Tier 1 Barnett is at $4.20.
This helps to explain why we actually saw production from Louisiana rise in the most recent EIA-914 -- producers are focusing their attention on plays that are economic at low gas prices such as Haynesville.
But, watch Texas production very carefully. TX is the largest producing State and in July produced nearly 5 times what Louisiana did. Part of that production comes from the Barnett Shale and other unconventional plays but a big chunk also comes from higher cost conventional wells which have seen a huge drop-off in activity over the past year. TX production has fallen for four consecutive months, a total of nearly 1 bcf/day.
An up-tick in production from the cheapest unconventional plays is not enough to offset declines in production from conventional and more expensive shale plays.
As for consumption, the key figure to watch is industrial consumption as that's where most of the gas demand destruction has come from. At one point this year, industrial demand was off 15 percent year-over-year while it's now down about 10 percent year-over-year, a notable slowdown in the pace of year-over-year declines.
Industrial gas demand did pick up in July as compared to June levels. It's unclear if that's just a blip or the beginning of a trend; however, the improvement in US economic and manufacturing data suggest we should see that continue into August and September.
On Oct 06 04:19 PM Ron2008 wrote:
> "Meanwhile, US natural gas production is plummeting due to the lack
> of drilling activity; producers need to see prices rally back over
> USD6 per MMBtu to start drilling and stem these production declines."
>
>
> Are you sure about that? I don't see any sources for that price.
> But I did find this.
>
> Producers in the Eagle Ford can break even when natural gas is priced
> as low as $3.88 per million British thermal units, the firm said,
> versus break-even prices of $5.18 in the Barnett, $3.74 in the Marcellus
> and $4.49 in the Haynesville.
> www.chron.com/disp/sto...
>
>
> Here's more data on consumption that is opposite of what you said.
>
>
> Consumption will fall by 2.4 percent this year and remain flat in
> 2010, according to the Energy Information Administration
Climate Change, Energy and Manufacturing [View article]
Solar is far from a practical technology or a solution to environmental concerns and the need to supply more power in developing countries to meet demand. The reality is mainly hype: solar will not amount to a significant percentage of energy generation in the US or any major economies for decades, if ever.
The media has made much of China’s decision to build a 2GW solar power plant, the largest and most ambitious plant ever built anywhere in the world. China signed a memorandum of understanding with First Solar (NSDQ: FSLR) to build the plant in Mongolia. The first stage, slated to get underway next June, would be for a 30 megawatt demonstration plant. Phase two would add another 100 megawatts of capacity, while the third stage would further expand this capacity by 870 megawatts. The first three stages of the project are expected to be completed around 2014. The final stage of the project would be completed in 2019 and would add another gigawatt of capacity.
This is an impressive project that will generate significant revenues for First Solar and could provide a useful proof of concept for China and other countries looking to build out solar capacity. But let’s slice through the hype and take a look at what it all really means. According to the EIA, China’s total generating capacity in 2007 was 624 GW. In the year 2007 alone, China added more than 105 GW to its capacity and this year the nation could add 80GW. In light of those figures, a 2 GW solar plant that will take a decade to complete sounds somewhat less impressive.
For China coal is the real workhorse. Of the 105 gigawatts added to China’s capacity in 2007, conventional thermal power plants accounted for 96 gigawatts and about 90 percent of that capacity was coal-fired. Coal isn’t dead, and it’s ridiculous to assume it can be replaced by alternatives in any reasonable time frame.
On Oct 06 01:56 PM Mad Hedge Fund Trader wrote:
> isc Solar is about to become a big part of our lives, as it careens
> toward long sought profitability, and it will suit you to learn more
> about it. To get a good introduction to the industry, both through
> some good engineering statistics and some great pictures, then check
> out the September edition of National Geographic magazine by clicking
> here . Total world electricity demand today is 16 terawatts (16,000
> megawatts), and that is expected to grow to 20 terawatts by 2020.
> Solar comes in two flavors, thermal and photovoltaic (seekingalpha.com/symbo...).
> Thermal is the old dinosaur technology, with thousands of convex
> mirrors arrayed to heat piped oil, which is then used to power a
> conventional steam power plan, converting about 24% of the sun’s
> energy into electricity. The future is with photovoltaic solar, which
> uses the semiconducting ability of silicon to grab electrons directly
> from sunlight. PV is less efficient at a 10% conversion rate, more
> expensive, but is making great leaps forward. It would only take
> 100 square miles of PV panels placed on rooftops to meet all of the
> electricity demands of the US. The final goal is to develop silicon
> paint which you then apply to your house to generate power, all for
> the cost of a bucket of regular paint. PV chips in the lab are already
> achieving efficiencies of 40%. First Solar (seekingalpha.com/symbo...)
> now owns the cutting edge with its thin film panels, a company I
> have written about extensively (click here for the report ). It is
> also a great trading vehicle, with plenty of volatility, and the
> recent silicon panel price war with China has knocked the stock down
> into “buy” territory. The additional of FSLR to the S&P 500,
> the first alternative stock to do so, is the writing on the wall.
> I regularly mine this magazine for long term technology and environmental
> trends, and my kids love cutting up the pictures. After all, it was
> founded by one of the original venture capitalists, Alexander Graham
> Bell, the inventor of the telephone.
Railroad Indicator: On Track for Recovery [View article]
For example, total loaded containers (import and export but excluding empties) handled by the Port fell 43 percent from October 2008 to February 2009. Some of this was a normal seasonal slowdown after New Year but typically the decline is on the order of 10 percent, not 43 percent.
Volumes jumped to 380,000 20-foot equivalent units (TEUs) in August, the highest since last October. The bounce back in both import and export TEUs has been tremendous since February though it's still down slightly from year-ago levels. If trends persist we should see TEU's jump back over 400,000. Looking at historical data going back to 1995, that level of activity would be considered brisk.
On Sep 22 10:19 AM Transportation Guy wrote:
> Undoubtedly traditional railcar loadings are an excellent LEI. Even
> the oracle of Omaha is on board with them in a big way. For the consumer
> side of things one needs to be in tune with international intermodal
> loadings, specifically the container import figures as they indicate
> "big box" stores supply chain replenishment, hence consumer demand.
> Watch US port activities as they relate to imported containers and
> then the railroad intermodal reports of ISO containers being handled
> on their respective systems.
Tiber Oilfield Spells Major Upside for Prices [View article]
For one thing, most deepwater rigs are contracted for years into the future at fixed or gradually adjusting indexed day-rates and thus see little or no near-term benefit from a particular discovery or jump in demand. For example, the rig you highlight is contracted to BP through October of 2010. RIG has a total of 18 ultra-deepwater floaters but a quick glance at their latest fleet status report shows that most are already committed. Three of those 18 are available for re-contracting next year, 5 in 2011, 2 in 2012 and the remainder after that. While this provides predictability of cash flow and earnings visibility it means that RIG only sees upside gradually from rising deepwater interest and demand.
If you're looking for a more direct play on accelerating deepwater development one area to keep an eye on would be subsea equipment producers like FMC Tech (FTI) or Cooper Cameron (CAM)
On Sep 08 08:23 PM William M. Wright wrote:
> Why are you recommending SLB on this find? Seems to me RIG is the
> best play for this and other deepwater drilling. This huge pool of
> oil is trapped 35,000 feet below the Gulf floor in a geological area
> known as the Lower Tertiary trend. That's nearly a mile deeper than
> Mount Everest is high !
>
> Transocean Ltd. (NYSE:seekingalpha.com/symbo...) today announced
> that its ultra-deepwater semisubmersible rig Deepwater Horizon recently
> drilled the deepest oil and gas well ever while working for BP and
> its
> co-owners on the Tiber well in the U.S. Gulf of Mexico. Working with
> BP, the Transocean crews on the Deepwater Horizon drilled the well
> to 35,050 vertical depth and 35,055 feet measured depth or more than
> six miles.
>
> So why recommend SLB when you should be recommending RIG???
Master Limited Partnerships for Your Portfolio: Three Key Questions and Answers [View article]
First, I do think IDRs incentive the GP to act in the best interest of the LP holders. The reason is that IDRs are based on the amount of money paid out to LP holders -- the split with the GP increases only when the payout to LP holders rises. In most cases, the GP will totally forfeit any IDR if a certain minimum distribution isn't met.
Second, while you are absolutely correct about the high split set at 50% for most MLPs and 25% for EPD, the calculation is a bit more complex than straight multiplication so the actual percentage take is not as high as that. Rather than bore readers with a lengthy comment, I'll try to post a blog in future with the exact calculation details. For now, suffice it to offer an example: Enterprise Products has a high split of 25% but in the first quarter of this year, the company paid a distribution of 53.75 cents to LP holders and just 9.22 cents per unit to the GP.
Third, there are some alternative partnership structures that do not have a GP/LP relationship. An example is Linn Energy (NSDQ: LINE), a limited liability company (llc). Linn is taxed similarly but has no IDR structure.
Fourth, it is extremely important to look at exactly who the GP is for a particular MLP and how capable they are of supporting the partnership in bad times. For example, last autumn Richard Kinder who controls Kinder Morgan's (NYSE: KMP) GP stated that he and the GP would step up with additional cash needed to fund expansion if credit markets remained constrained. And some MLP GPs are actually energy firms with assets they can "drop-down" to the MLP when times are troubled to shore up cash flows. On the other side of the coin are GPs controlled by private equity firms that may be overly reliant on debt.
Fifth, you can actually play the other side of the IDR coin if you wish -- there are a handful of publicly traded GPs that are taxed like MLPs. Enterprise GP Holdings (NYSE: EPE), GP for Enterprise Products Partners, is one example.
On Aug 30 04:17 PM Uncle Pie wrote:
> When investing in MLPs, be aware of the "incentive distributions"
> paid to the general partner. Most MLPs have a provision that once
> the distribution per share rises above certain levels, the general
> partner is entitled to a larger percentage of the cash flow. After
> a certain point is reached, the "incentive distribution" often maxes
> out with an extra 50% of the cash flow going to the general partner.
> This is referred to as the "high splits". Some MLPs, to their credit,
> have capped the incentive distribution at 25%. Enterprise Products,
> EPD, referenced in the article, is an example of an MLP with a 25%
> max. It's all in the prospectus, but you should know that when you
> invest in a "high splits" MLP, you are basically putting up 100%
> of the capital for 50% of the return. The author owns units of EPD
> and several other MLPs. The author was pleased with the performance
> of his MLP securities during the recent market meltdown relative
> to many other holdings!
The Real Price of Crude Oil [View article]
Your comment makes a completely valid point. Basically, at $20 or $40, much of the world's production isn't economic. As global oil demand returns in coming months, the important point to consider is really what is the marginal cost of oil? In other words, what does it cost to bring an incremental barrel into production to meet demand. Reserves like the oil sands and perhaps deepwater would represent marginal barrels -- if production is to actually increase, exploiting these marginal barrels needs to be profitable.
In its recent conference call Schlumberger (NYSE: SLB) made some interesting comments in this regard. It seems that the company believes oil prices will need to be around $70 at year end if production firms are going to have enough confidence to increase their capital spending budgets. At $40 they'd slash CAPEX plans and global oil production would fall off quickly. And if oil prices look to be too volatile they may also be reluctant to boost CAPEX.
There is a very real risk that in 2010, the CAPEX cutbacks of late 2008, early 2009 will come home to roost in the form of falling production just as global demand re-accelerates. Then, you have the recipe for a real spike.
On Aug 27 02:52 PM Donald Ingram wrote:
> The US gets most of it's oil supply from Canada and most of that
> comes from the oil sands where the cost of production is $60 to $70
> USD per barrel. In the event of a down turn in oil to as much as
> $40 USD per barrel, the amount of oil exported to the US from Canada
> would suffer cut backs from the oil sands, instigating a short term
> shortage, which would then have the effect of driving up prices at
> the pump.
The Real Price of Crude Oil [View article]
After all, gold is often considered the ultimate currency. Certainly, it has been accepted as money for more than 1,000 years and, therefore, has more legitimacy than the paper we call the US dollar.
At the beginning of 2009, a barrel of oil (based on WTI spot) cost 0.0506 ounces of gold. Now, that same barrel costs 0.076949 ounces of gold. Not saying the dollar is meaningless, just saying that not all of oil's advance is the weak dollar, there are other forces at play.
On Aug 27 10:19 AM Steve in TN wrote:
> For residents of Europe the rise in oil prices is not nearly as steep
> as in the U.S. Corrected by currency levels, the current price of
> oil in Europe, in general, is around $61.
Giving Credit to the Growth Engine [View article]
While I agree that politics are always a wild card, the risk appears minimal at this time. After all, last year as part of the Emergency Economic Stabilization Act of 2008 (aka the Bailout), Congress actually expanded the MLP structure to allow these firms to handle renewable fuels. In addition, a recent Treasury report estimated that the total cost to the government is roughly $500 million -- a paltry sum when you consider the size of the US deficit.
In fact, it's possible Congress may view the structure as a way of encouraging investment in alternative/renewable energy.
On Aug 17 06:36 PM Prudent Man CFA wrote:
> Nothing like touting your own service and holding it out as objective
> analysis. I thought MLPs died decades ago. With an anti-business
> Administration I would be very careful of any promised tax advantages.