Exploration & Production MLPs
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.
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
[...] Oil & Gas MLPs While the oil majors – RD Shell (RDS.A), Exxon Mobil (XOM), Marathon Oil (MRO) – have been supporting their stocks through massive buybacks and increasing dividends, such distributions could be at risk should oil prices stay far below $60/barrel for more than the next year. Smaller Oil & Gas MLPs have similarly large distributions (read: dividends) and many have entered serious hedging contracts that could keep dividends safe for up to the next two years. For more on this interesting asset class and a few interesting names check out my post on Exploration and Production MLPs. [...]
My tax accountant has refused to respond to my inquires over the issue of the income erroneously reported on my 2007 return from a K-1 form. The $38 becomes a moot point as to it’s size. They just can’t be bothered. Unfortunately as a result this also ended up being reported on my state return. Unfortunately even a hot shot tax accountant does not do every tax return themselves. They hire the temps who when faced with a confusing issue that should be straight forward resort to short cuts or just make incorrect entries to save time and labor costs. For their convenience the client forks over +$750 for expert tax prep. K-1 forms are a minor problem when filing but if the investment is in a tax sheltered account they become more difficult. The IRS generally now allows up to $1000 in UBTI in total for all your accounts. As long as you do not exceed that you have no tax issue except with an ignorant tax accountant that reports this or any other K-1 distributions as income even though the K-1 plainly indicates an IRA. To avoid these headaches without losing an opportunity to participate in this asset class there are several vehicles that avoid generating K-1 forms altogether. The interest not dividend paying BSR, the KYN, and the MTP are a few. There are many closed end funds that also have some % of their investments in MLPs as well.
My problem with MLPs is: They have until April 15th when unit holders must receive the schedule K-1. On this form are the previous year’s income, etc. This makes filing one’s tax returns very difficult, if you file yourself, as my spouse and I do. I won’t invest in any MLP unless someone can show me where I’ve gone wrong.
[...] Energy (LINE) is an exploration and production MLP. An MLP is a publicly traded vehicle that is structured as a limited partnerhsip. As a result, [...]
[...] Oil & Gas MLPs While the oil majors – RD Shell (RDS.A), Exxon Mobil (XOM), Marathon Oil (MRO) – have been supporting their stocks through massive buybacks and increasing dividends, such distributions could be at risk should oil prices stay far below $60/barrel for more than the next year. Smaller Oil & Gas MLPs have similarly large distributions (read: dividends) and many have entered serious hedging contracts that could keep dividends safe for up to the next two years. For more on this interesting asset class and a few interesting names check out my post on Exploration and Production MLPs. [...]