Investing In Energy MLPs - Skip The ETFs And Get The Deals

Summary

• Energy MLPs have been significantly punished by the market. There exist many opportunities, but evaluating each one is difficult.
• Energy MLP ETFs have high expense ratios. They range from 0.45% to 0.85%. A 0.85% difference results in a 20% difference in gains after 30 years.
• I recommend reconstructing an Energy MLP portfolio using your own assets, and I give an example using $10,000 below.
• This idea was discussed in more depth with members of my private investing community, The Energy Forum. Get started today »

I recommend starting by reading my oil price forecast for 2020, available here.

Midstream MLPs were, until 2014, a fairly proven business model. However, in the time since, they've clearly been out of favor with the market seeing their stock prices drop, increasing their yields. Ordinarily this is a good thing, however, the midstream MLP business model relies on some fundamental stability in the unit price.

Due to growing energy consumption and production in the United States, along with long-term energy needs, investing in the currently out of favor MLPs is a great way to build assets in strong companies and gain long-term income and income growth.

Oil Infrastructure - Oil Price

MLP Overview

What is an MLP?

MLPs are a fairly simple model. They are a partnership that allows groups of people to work together to invest in quality businesses. They are publicly traded and each thing you buy on the exchange is a single "unit".

MLPs take effectively all of the cash they generate and pass it through to unit holders as a dividend. That allows them to avoid paying corporate taxes on their profits. That's much better than energy infrastructure companies that pay dividends. When paying dividends not only is the company taxed, but so too are those who receive the dividends.

However, what sounds like a trade-off to some shareholders is also a negative to others. The main aspect of being an MLP, and being able to avoid the taxes, is the need to distribute all cash flow. So what happens if you want to grow?

Generally, companies grow using one of three methods - leftover profits, equity issuance, or debt.

As discussed already, the fundamental model of an MLP doesn't allow leftover profits to be invested. Almost all the profits have to be paid for the company

Analyst’s Disclosure:I am/we are long AMLP, BPMP, CEQP, CNXM, DCP, ENBL, EPD, EQM, ET, GEL, HEP, LNG, MLPX, MMP, MPLX, NGL, NS, PAA, PSXP, SHLX, TCP, TGE, WES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.