Recent Performance Review For 5 High Yield Large-Cap Oil And Gas MLPs

Includes: EPD, ETP, KMP, OKE, WPZ
by: Zvi Bar

MLPs provide their investors, known as limited partners, with distributions that are like corporate dividends, but which are taxed differently. Most MLPs involve oil and gas, and usually as pipeline businesses that earn relatively stable income from the transport fees for oil, gasoline and natural gas. The majority energy MLP analysts estimate that the distribution growth of pipeline MLPs should grow at a rate at or ahead of inflation.

Many MLPs declined over the last few months, as traders cycled out of certain energy and higher-yielding investment allocations. Like electrical utilities, many MLPs have primarily traded based upon their yield, making share prices susceptible to interest rate changes. Additionally, many funds dedicated to delivering above average income include MLP allocations, and it is entirely possible that MLPs are suffering from a general income oriented flow of funds transition from high-yield fund producers to high credit quality fund options, most of which provide a significantly lower yield by comparison.

Oil and gas pipeline MLP revenue is primarily based on the amount of product transported, and not on the price at which it sells, though there is some price exposure. Nonetheless, sometimes price changes are significant enough to affect demand in a manner that could be either good or bad for a pipeline. Conversely, exploration and production MLPs are highly sensitive to commodity price changes, and their own individual production rates which are dependent upon many factors, including management decisions and government permits & licensing, among many others.

Below are the recent performance rates and present yield for five MLPs that are traded within the United States with market capitalizations of at least $10 billion and yields of at least 4.5 percent: Energy Transfer Partners LP (NYSE:ETP), Enterprise Products Partners LP (NYSE:EPD), Kinder Morgan Energy Partners LP (NYSE:KMP), ONEOK Partners LP (OKS) and Williams Partners LP (NYSE:WPZ).

Because so many individuals allocate into MLPs for the yield, MLPs are likely to continue to be affected by fixed income yield fluctuations. Concerns over potential spiking of U.S. interest rates were widespread within the market just a few months ago, but the recent trend has been for rates go continue to move lower. A significant increase in the risk free rate of return might not bode well for this asset class, which has made its mark as an income supplement and alternative in a low interest rate market. Nonetheless, in the short term, these MLPs appear to be declining along with the broader market as well as many high yielding but generally lower quality, or higher risk, options.

So far this year, most of these MLPs have underperformed the broader market, as investors have lessened their allocations in high yield options and energy-related investments. Nonetheless, these MLPs have declined less than the benchmarks over the last month. Though four of these five MLPs are down compared to their 2012 starting price, four of them are up compared to their year ago price before considering the large distributions each has paid out. See the 1-year comparison chart, below:

Certain MLPs that are more involved with exploration rather than transportation are often highly sensitive to oil price. Sometimes, pipeline MLPs sell off when oil or gas spikes down, even where the business itself is not necessarily affected by the commodity price so much as by demand for it. Some pipeline contracts are sensitive to commodity prices, though a substantial amount are a strict pipeline toll that grows at predetermined rates, much like a long term commercial lease.

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.