All About MLPs

All About MLPs

Master Limited Partnerships

MLP Directory • How to Find the Best MLPs

Master Limited Partnerships are similar to real estate investment trust in that they do not pay income taxes, and their shares trade on the major stock exchanges just like regular stocks. However, REITs and MLPs are different in structure. Unlike REITs, which are a special type of corporation, MLPs are partnerships. An MLP’s general partner is responsible for running the partnership, and individual investors are limited partners.

MLPs get special tax treatment. An MLP does not incur income taxes. Its income is allocated among all partners in proportion to their ownership interest. To qualify for the tax benefit, 90% of an MLP’s income must come from activities in real estate, commodities, or natural resources such as mining, timber or energy production and related activities. However, MLPs may not be suitable for IRAs and other tax-sheltered accounts. Be sure to review the Tax & Liability Considerations section before you buy.

We’ve divided the MLP universe into the following categories:

Pipeline Operators

The special tax treatment afforded MLPs seems to have a special appeal to major oil and natural gas producers. Many of them have transferred their petroleum and natural gas pipeline assets to MLPs that the oil companies control as general partners.

Within pipelines, we have crude oil/refined products (gasoline, heating oils) pipelines and natural gas pipelines.

Crude oil pipeline operators enjoy a stable business. Their fees are regulated and are based on the volume of product transported, not by the price of oil. So while earnings may dip if the winters are too warm, or the summers too cool, long-term, earnings growth reflects expansion activities.

By contrast, natural gas pipeline operators often also operate gas-gathering systems, which connect individual wells to public pipelines, which then connect to processing plants. Typically, gathering and processing contracts do expose pipeline operators to changes in the price of natural gas and its byproducts. So, natural gas pipeline operators’ profit margins can vary with the price of the commodity. Some operators employ hedging strategies to reduce their susceptibility to price swings. But not all do because that limits their upside potential.

We also have a diversified product pipeline category for firms operating both natural gas and crude oil pipelines.

Propane Retailers

These partnerships sell propane and/or heating oil products to residential, commercial, industrial and agricultural customers. Except for Inergy, which is an aggressive acquirer, most propane retailers are relatively slow growers.

Exploration & Production

Exploration and production partnerships generally produce crude oil, natural gas, or coal from reserves that they own. The only exceptions are coal mine owners Natural Resource Partners and Penn Virginia Resource Partners. They own the mines, but contract with others to do the digging.

Most oil and natural gas exploration and production partnerships are new to the game and have yet to produce consistent and predictable cash flow growth.

Shipping

Shipping partnerships fall into two groups. Some provide specialized oil or refined product transportation services in U.S. coastal areas, and the others are conventional oil tanker operators.

Real Estate Property & Finance

This is a diverse group. One invests in tax-exempt mortgage revenue bonds, another owns apartment communities, and the third provides financing to apartment developers.

Other Businesses

An interesting collection of partnerships that don't fit neatly into the other categories. Some are intriguing energy plays, while others, such as an amusement park operator and an investment manager, are in entirely unrelated businesses. Those would not be allowed MLP status under current law, but were in already business before the current rules were enacted and are allowed to continue operating.

See the complete list of MLPs in the MLP Directory