A Master Limited Partnership ("MLP") is a kind of partnership that is publicly traded. MLPs combine the tax structure of a partnership 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 natural gas.
Many oil and gas MLPs make their revenue from the amount of product transported, though some are involved in the discovery and extraction of resources. Distributors should not be highly sensitive to underlying commodity price fluctuations except to the extent that they affect demand for the commodity.
MLPs usually provide their investors, or 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. Additionally, non-competitive pipelines have an industry standard annual price increase of PPI + 2.65%, which is superior to most other long-term lease rates.
Below are the recent performance rates and present yield for seven MLPs that are traded within the United States with market capitalizations of at least $5 billion and yields of at least 4%, or over double the current 10-year U.S. Treasury rate: Energy Transfer Equity LP (NYSE:ETE), Energy Transfer Partners LP (NYSE:ETP), Enterprise Products Partners LP (NYSE:EPD), Kinder Morgan Energy Partners LP (NYSE:KMP), Magellan Midstream Partners LP (NYSE:MMP), ONEOK Partners LP (OKS) and Williams Partners LP (NYSE:WPZ).
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The year 2011 was a broadly positive one for several of the larger pipeline MLPs, though some underperformed the industry and the broader market. These seven companies averaged 17.28% equity appreciation and a 5.6% distribution yield within 2011, which would combine to equal just under a 23% total return.
So far within 2012, the only listed equity to be down is ONEOK, which was the best performing listed equity in 2011, appreciating 45.75%, plus paying a 4.2% dividend based on its year-ending value, or 5.61% based on its year-starting value.
MLPs often sell off when oil prices go down, even when the business is not necessarily affected by the commodity's decline. Certain MLPs that are more involved with exploration rather than transportation are highly sensitive to oil price, in either direction. Additionally, pipelines may be transporting different forms of petroleum such as oil, natural gas and liquefied gas, each with their own supply and demand issues.
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 usually then taxed at the investor's individual tax rate. These distributions may also reduce one's cost basis.
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.