2011 Performance Review For 7 High-Yield Mid And Large Cap Oil And Gas MLPs

by: Zvi Bar

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 to public equities. Most MLPs are publicly traded oil and gas pipeline businesses that earn stable income from the transport of oil, gasoline and natural gas.

Many oil and gas 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 MLPs.

MLPs usually provide their investors, the limited partners, with distributions that are similar to dividends, but taxed differently. 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.

Below are the recent performance rates and present yield for seven MLPs [ETE, ETP, EPD, KMP, MMP, OKS and WPZ] that are traded within the United States and that have market capitalizations of at least $5 billion and yields of at least four percent, or over double the 10 year U.S. Treasury rate. Click to enlarge.

And below is a 2011-to-date performance comparison chart: Click to enlarge.

As these performance rates indicate, 2011 was a broadly positive year for this group of MLPs. The seven companies averaged 17.28% equity appreciation and a 5.6% distribution yield, which would combine to equal just under 23% appreciation in 2011. This compares to approximately 6.12% appreciation for the DJIA and less than one percent appreciation for the S&P 500, with both index options offering less than half the average yield.

MLPs do 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.

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 their share of the partnership's net income. That income is usually then taxed at the investor's individual tax rate. These distributions may also reduce ones cost basis.

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.

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