A Master Limited Partnership (MLP) is a type of partnership that is publicly traded on a securities exchange. MLPs combine the tax structure of limited partnerships with the liquidity of publicly traded securities. Usually, private partnerships are relatively illiquid compared with public equities. Most MLPs are publicly traded oil and gas pipeline businesses that earn stable income from the transport of oil, gasoline and/or natural gas.
Many MLPs derive their revenue based on the amount of product transported and are not sensitive to price fluctuations except where they affect demand. Some MLPs involve other natural resources, and certain other industries, but oil and gas are the most common sectors. MLPs usually provide their investors, the limited partners, with distributions similar to dividends, but which are often taxed differently. MLP tax issues can make them unsuitable for IRAs and similar retirement accounts.
MLPs often sell off when oil goes down even where the business itself is not necessarily hurt by the commodity drop. Certain MLPs that are more involved with exploration rather than transportation are more sensitive to oil price, while the purer pipelines could see increased demand at lower prices. Additionally, the exploratory MLPs can be hyper-sensitive to oil spikes in either direction.
It is expected that the distribution growth of MLPs can grow at a rate at or ahead of inflation, based upon energy demand and price growth. Non-competitive pipelines have an industry standard annual price increase of CPI + 2.65 percent, which is generally superior to other long-term lease rates.
Below are seven MLPs that are traded within the United States with market capitalizations of at least $5 billion and yields of at least 5%. I have provided their present annual distribution percentage rate as well as their 1-week, 1-month and 2011-to-date performance rates.
Enterprise Products Partners LP (NYSE:EPD)
- Yield: 6%
- 1-week: -2.08%
- 1-month: -3.77%
- 2011-to-date: -3.75%
Kinder Morgan Energy Partners LP (NYSE:KMP)
- Yield: 6.7%
- 1-week: -2.83%
- 1-month: -2.95%
- 2011-to-date: -4.16%
Magellan Midstream Partners LP (NYSE:MMP)
- Yield: 5.2%
- 1-week: -0.55%
- 1-month: 0.56%
- 2011-to-date: 6.07%
ONEOK Partners LP (OKS)
- Yield: 5%
- 1-week: 4.94%
- 1-month: 5.96%
- 2011-to-date: 14.25%
Williams Partners LP (NYSE:WPZ)
- Yield: 5.4%
- 1-week: -1.39%
- 1-month: -1.81%
- 2011-to-date: 11.33%
Energy Transfer Partners LP (NYSE:ETP)
- Yield: 8.7%
- 1-week: -6.13%
- 1-month: -8.74%
- 2011-to-date: -23.00%
Energy Transfer Equity LP (NYSE:ETE)
- Yield: 7.2%
- 1-week: -9.56%
- 1-month: -12.41%
- 2011-to-date:-15.46 %
These MLPs have become significantly more volatile over the last few months and the performance of these companies has begun to vary significantly. About half are down in 2011 and about half are up, with performance variations between a 23 percent loss and a 14.25 percent gain. See the 2011 chart, below - (click to enlarge):
It appears that these performance differences are based upon exposure to oil prices (whether actual or perceived) as well as potential demand concerns for particular regions. Nonetheless, as a group, this asset class has broadly outperformed the traditional equity markets so far in 2011, especially when distributions are included in the calculations.
MLPs are partnerships, so they do not pay corporate income taxes. The tax liability of the MLP is passed on to its unit holders. Each investor receives a K-1 statement that details his or her share of the partnership's net income. That income is then taxed at the investor's individual tax rate. MLPs may also make cash distributions that are not taxed but reduce the cost of partnership shares/units and create a tax liability that is deferred until the MLP is sold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.