Performance Review: 7 Large, High-Yield Oil And Gas MLPs

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Includes: EPD, ETE, ETP, KMP, MMP, OKE, WPZ
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 a private partnership will be rather illiquid compared with a public partnership. Most MLPs involve oil and gas, either as pipeline businesses that earn stable income from the transport of oil, gasoline and natural gas, or as exploration and drilling partnerships.

An oil and gas pipeline MLP's revenue is based on the amount of product transported and not on the price of oil or gas. As a result, pipeline MLPs shouldn't be highly sensitive to price fluctuations, except where they are significant enough to affect demand.

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 pipeline 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 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 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):

2011 was a broadly positive year for most of the larger pipeline MLPs, with a few exceptions. These seven companies averaged 17.28% equity appreciation and a 5.6% distribution yield within 2011, which would combine to equal just under 23% appreciation. Several have continued to perform well thus far into 2012, as investors continue to seek out high yield. Thus far in 2012, the above-listed equities have appreciated 6.45 percent.

MLPs often sell off when oil goes down even where the business itself is not necessarily hurt by the commodity drop, even where the price change will not affect the MLP's revenue. Certain MLPs that are more involved with exploration rather than transportation can be highly sensitive to oil price. 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.