Introduction to High-Yield, Small Cap, Oil and Gas MLPs, Plus 8 to Consider

by: Zvi Bar
In furtherance to my recent primer on MLPs and article on mid-cap MLPs with a yield of at least 6%, this article introduces a group of small-cap MLPs. The MLPs mentioned have a capitalization between $1 & $3 billion, with yields between 5.7% and 8%.
Why Small-Cap MLPs?
MLPs are a growing asset class. There are a few giants in the business and several small pipeline partnerships. The small-cap MLPs may be preferable investments because it will be easier for them to, for example, ramp up their business.
There has been significant growth in interest for this asset class and as more money comes into the MLP asset class, it is likely that M&A activity will heat up. M&A activity tends to benefit the smaller market participants, as they are acquired by the larger participants. Smaller companies that are less covered by Wall Street may also trade at preferable valuations to the larger ones. They may also later benefit technically from Wall Street coverage.
These benefits do not come without risks. Smaller companies can be more sensitive to industry changes. Their smaller size also likely means lower volume and liquidity, which can also result in more volatile changes to market prices.
It would probably not be prudent to exclusively own small-cap MLPs, but a reasonable fraction of a portfolio may be prudently invested in one or several of these partnerships with the intention to supplement the energy consumption and income production portions of asset allocation.
MLPs and Taxation
MLPs are partnerships, so they do not pay corporate income taxes on either a state or federal basis. They are fairly similar in this regard to the once great Canadian Royalty Trusts (Canroys) that Canada recently eliminated, forcing restructuring. Additionally, the investing limited partner might be able to record a pro-rated share of any depreciation to reduce tax liability. However, this theoretical advantage does not exist where the MLP is held in a tax-deferred account, such as an IRA. Nonetheless, they are often effectively used in IRAs for their high yield characteristic alone.
The tax liability of the MLP is passed on to its shareholders. Each investor receives a K-1 statement that details their share of the partnership's net income. That income is then taxed at the investor's individual tax rate. The MLP may also make cash distributions that are not taxed received, but reduce the cost of partnership shares/units and create a tax liability that is deferred until the MLP is sold.
Eight Small-Cap MLPs That Currently Yield between 5.7% and 8%
Breitburn Energy Partners LP (BBEP)
    • Yield: 8%
    • Market Capitalization: $1.23 billion
    • Debt: $416.8 million
    Copano Energy LLC (NASDAQ:CPNO) LLC, not a LP
      • Yield: 6.9%
      • Market Capitalization: $2.24 billion
      • Debt: $683.8 million
      • NOTE: Actually an LLC, not a partnership or MLP, but with a very similar structure that allows for pass-through accounting.
      DCP Midstream Partners LP (DPM)
        • Yield: 6.3%
        • Market Capitalization: $1.75 billion
        • Debt: $698.6 million
        Genesis Energy LP (NYSE:GEL)
          • Yield: 6.1%
          • Market Capitalization: $1.75 billion
          • Debt: $639.5 million
          Holly Energy Partners LP (NYSE:HEP)
            • Yield: 6.3%
            • Market Capitalization: $1.21 billion
            • Debt: $523.5 million
            Sunoco Logistics Partners L.P. (NYSE:SXL)
              • Yield: 5.7%
              • Market Capitalization: $2.8 billion
              • Debt: $1.2 billion
              Targ Resources Partners LP (NYSE:NGLS)
                • Yield: 6.6%
                • Market Capitalization: $2.9%
                • Debt: $1.2 billion
                TC Pipelines LP (TCLP)
                  • Yield: 6.5%
                  • Market Capitalization: $2.12 billion
                  • Debt: $515.8 million
                  Many of these small-cap MLPs, like the larger ones, appreciated considerably over the past year. Due to this potentially dramatic appreciation, it may be wise to prepare a list of those with characteristics you like and watch them for a better entry price. Of course, if you chose that course of action six months ago, you probably would have missed out on some decent growth and/or distributions.

                  Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

                  Disclaimer: Yield is but one consideration in choosing an investment, and each investment should be considered relative to the total portfolio and its objectives.

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