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MLPs are a multidecade story, not multiyear, says Chris Eades (CEM, EMO, CTR). His partner in a...

MLPs are a multidecade story, not multiyear, says Chris Eades (CEM, EMO, CTR). His partner in a mini-Barron's roundtable, Kyri Loupis takes note of non-economic factors which keep MLP yields higher than REIT yields. "Maniacally focused" on yield, MLP investors should instead consider yield growth as a key metric, says Eades. His top pick is Targa Resources Partners (NGLS), still considered as having huge exposure to commodity prices even as fee income is set to rise to 65% of revenues.
Comments (8)
  • I agree that Targa is an attractive investment and have like it for a long time (though do not own it).

     

    But as for the multi-decade part - as an MLP owner - I do expect that at some time the tax laws are going to be changed. I don't know exactly what will happen obviously, but the day will come where part of the distributions are going to be taxed at ordinary income levels at the very least. More likely will be some sort of enterprise tax that forces the legal entity to pay prior to distributions.

     

    I certainly hope there are great gains ahead, but IMO the "easy" money has been made. Going forward there will be winners and losers within the spectrum of MLP's.
    24 Feb 2013, 12:04 PM Reply Like
  • There are likely to be several IPOs of MLPS in the next 24 months and dozens of new MLPS are likely to be created over the 5 years.
    North American oil, liquids and natural gas production is on an unprecedented multi year growth trajectory.
    This is creating multiple opportunities for MLPs in both upstream and midstream segments of the value chain.

     

    Usually such an era of rapid growth and new entrepreneurial ventures is followed by major consolidation. Given the nature of MLPS investors are thus positioned to garner both very attractive yields and upon exit via consolidation, substantial equity uplifts.
    24 Feb 2013, 12:44 PM Reply Like
  • I look at MLPs that pay mostly return of capital as being like IRAs with the plus of being taxed (long term) as cap gain rather than ordinary income, particularly if you roll the payments over into more MLPs. Am I right?
    24 Feb 2013, 01:32 PM Reply Like
  • Davephd,
    Owning an MLP is more like directly owning an actual business, since that's just what the MLP structure allows you to do. Only usually you are a "limited partner" with no say in the running of the business and you usually are required to pay "incentive distributions" to the general partner, meaning that the distribution of profit between general and limited partners is NOT equal. There are a few MLPs like ETE or EPD which there are no "incentive distributions" and they are worth seeking out.
    After many years of tax sheltered distributions you cost basis hits zero and from then on the portion of your distribution which is not taxed on schedule E or A or D or B is considered a long term capital gain. Were you to sell your zero-tax basis MLP units, you'll pay a huge tax, so don't ever sell. Hold them until your dying day and under existing laws your heirs will get stepped up basis and can begin the game all over again.
    Long ETE, EPD and several other MLPs.
    24 Feb 2013, 02:47 PM Reply Like
  • Uncle - Thanks for the info, I knew the structure but not the incentive distribution part. If the MLP is paying mostly return of cap is the distribution also unequal most of the time? I have enough long term cap loss carry over from GM bonds, etc, to negate the cap gain for several years and will probably cash out when that is exhausted. Long term davidbdc is probably right, the tax structure will likely change.
    24 Feb 2013, 04:48 PM Reply Like
  • The distributions you receive are NOT return of capital and you would NOT be offsetting them yearly from your carried forward capital losses from other ventures. What uncle is (correctly) telling you is that when (normally after MANY years) your basis in the MLP has been reduced to zero by process of the cumulative distributions (since your purchase) exceeding the countable/taxable income generated (and, upon which, if it is income rather than loss, you have paid individual taxes), the distributions then, to the extent that they exceed countable/taxable income in any given year, will be taxed as a capital gain. It is then and only then that any capital losses (that you have carried forward from other ventures) could be used to offset the gains represented by partnership distributions, just as they can offset any other capital gain you might have in a current year. Any losses that may have accumulated and carried forward in your share of the partnership over the years of your ownership can only be claimed when you make a full and final disposition of your interest in the partnership.

     

    Some MLPs pay a fluctuating distribution based on past quarter results but most try to maintain a stable quarterly payout throughout the year and many will raise distributions modestly each year. Some even have a record of doing so each quarter. Each has to be closely reviewed to identify its particular distribution practices.
    24 Feb 2013, 05:31 PM Reply Like
  • Uncle Pie,
    While you are correct about EPD, ETE is itself the recipient of incentive distributions as the GP of ETP and some other MLPs--a very complex situation. Some examples of internally managed MLPs, those without General Partners, are MMP and MWE.
    24 Feb 2013, 09:48 PM Reply Like
  • CincinnatiRick - Thanks, but I wasn't thinking that the return of cap could be deducted each year from carry over cap loss, just that after several years if I sell, then the total could be deducted. I have been told that with some MLPs, such as BBEP, the payment is 100% return of cap. Is this the case?
    24 Feb 2013, 08:34 PM Reply Like
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