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Interesting Times For All Commodities And Investments!! MLP SPECIAL EDITION !!!

I am posting here a comment from a follower that I think might warrant special attention. This area is of great importance to some followers and I would appreciate comments on it !!

Energy related MLPs are often considered and discussed by investors as a monolithic asset class. In fact, however, there are many sub-categories of energy MLPs which vary from each other significantly in terms of structure, purpose, risk and, correlatively, yield.

In terms of oil and gas operations the partnerships reflect the industry categorizations of upstream, midstream and downstream companies.

Turning to upstream companies first, some are oil weighted, some are natural gas weighted and both often also produce natural gas to be processed into natural gas liquids, such as ethane, propane, butane, isobutane and natural gasoline. Some upstream partnerships hedge their production completely for years out and whenever an acquisition is made, others hedge less. Some emphasize shale related plays and horizontal drilling, others emphasize more traditional basins and vertical drilling. Most upstream MLPs do recite the mantra of looking for low decline rate, lower capital requirement leases. Among the gas heavy companies most seek wet gas locations but others have legacy dry gas leases held by production. In terms of oil, production ranges from heavy oil with low API gravity ratings to light oil with high API gravity ratings, and these days there is a very large amount of light condensate being produced as well. For those upstream producers of natural gas liquids, while the propane business has thrived due to the cold winter and to exports, there has been ethane rejection by many upstream producers (and midstream processors as well) which has had an adverse impact on their bottom lines.

Midstream MLPs perform a vast variety of functions with a vast variety of assets in different geographies, and again, some emphasize liquids and some emphasize gas. There are pipeline companies, some of which carry gas, some of which carry oil and some of which carry natural gas liquids. Of the oil pipeline companies some are now adding railroad facilities as well.There are gathering and processing companies, which collect natural gas, treat it (clean out impurities) process it (separate the gas from the liquids) and fractionate the liquids producing ethane, butane, isobutane, propane, and natural gasoline. Some of these processing companies have little or no exposure to commodity pricing in their fee based contracts with their customers, while others have commodity exposure under percentage of proceeds or keep-whole contracts. The latter MLPs hedge this exposure to varying degrees.There are also compression MLPs, primarily for gas pipelines but also for oil lifting. Other MLPs are in the business of terminaling and storage. The economics of oil storage and gas storage have differed materially in recent years, with gas storage being far less economically rewarding than oil terminaling and storage. And of course, many MLPs perform more than one of these functions. Other midstream MLPs process sulfur or ashphalt, the heavier components in oil production, or engage in barge transport of oil, sulfur, or other petroleum based commodities on the river or in the Gulf.

Downstream MLPs engage in refining and marketing. Until recently the volatility of refining crack spreads were thought to make refiners unsuited for MLPs, but recently a new breed of MLPs--those with varying distributions and known as variable rate MLPs--have emerged. Among them are refiners and providers of specialized frac sands. Another developing class of MLP is the liquification (formerly, before the boom in gas production, it was going to be deliquification of imported gas) of natural gas for export.Retail sales of gasoline is not MLP qualifying income and since 90% of the MLPs' income must be qualifying one must keep an eye on these non-qualifying activities, which also include convenience stores at service stations.Wholesale sales of petroleum products is acceptable. There is also another class of MLPs which engage in wholesale and retail distributions of propane, and now some midstream MLPs are also starting to export propane.

There are also MLPs in the coal business, some of which produce thermal coal and some of which produce metallurgical coal.

There are also shipping MLPs, some of which operate oil tankers, some of which transport liquefied natural gas, some of which transport dry bulk such as coal.

Other MLPs are engaged in offshore oil and gas production, operating drill ships, jack up rigs, and production, storage and offloading vessels.

There is also considerable geographic diversity of operations of MLPs. Coal production may be found in Appalachia and in Wyoming. Oil and gas operations vary from California to the Bakken in North Dakota, to the Marcellus and Utica, to the Permian Basin, to the Eagle Ford play, from the Hugoton to the Granite Wash, from the Niobrara to the Woodford, Barnett, Haynesville and beyond.

In addition, many general partners of MLPs are themselves MLPs which are publicly traded. Most MLPs pay their general partners incentive distribution right payments, but some have reorganized and made their general partners into subsidiaries which do not receive such payments. And, of course, those structured as LLCs do not even have general partners.

The portion of the distributions which are tax deferred will vary among and between MLPs depending on such things as depreciation, depletion, and intangible drilling costs.

Therefore, as can be seen, it is possible to create a portfolio of diversified MLPs.

The ideal owner of MLP units is a patient seeker of tax deferred income. MLPs are not generally suitable as trading vehicles because of the reduction in basis caused by distributions which are tax deferred and because of the recapture as ordinary income on the sale of MLP units.

Elliot Miller