Exploration & Production MLPs

Posted by Dan Hung

October 28, 2008

In looking for potentially high-yielding stocks to bouy my portfolio through the current downturn, I was tipped off on an asset class known as E&P MLPs. What are E&P MLPs? Well, first and foremost, an MLP is a business structure that is slightly different from the typical corporations that are listed on various exchanges. MLP stands for master limited partnership. “Shares” in a MLP are actually referred to as units and, as in a typical partnership, income that the MLP generates must be distributed to various partners. Thus, when you own units of an MLP, you don’t get a dividend but a distribution. MLPs are allowed to avoid double taxation as they are not taxed at the “corporate” level and instead each partner is taxed on his distribution as regular income.

There are many tax implications to this structure and I do recommend that you read this Morningstar.com article on MLP yields and taxes and do some research on the tax implications on your portfolio before diving into MLPs. The most notable fact of this structure, however, is that MLPs offer very attractive yields to their owners.

One particularly, interesting class of MLPS is that of exploration and production (E&P) companies which typically operate pipelines and other distribution methods for oil or natural gas or other petroleum products. These companies have been hit hard given credit market turmoil and sharp declines in the prices of oil and natural gas. At current price levels, however, they now offer a very interesting way to gain exposure to a potential rebound in oil and natural gas prices while also providing very attractive baseline return through distributions. A few names that have piqued my interest include Linn Energy (LINE), EV Energy Partners (EVEP), Pioneer Southwest Energy Partners (PSE), and Vanguard Natural Resources (VNR).

Full Disclosure: No positions in the businesses mentioned at this time.