MLPs are Here to Stay
Thursday, February 7th, 2008
MLPs and the Market
The media focus on a US recession and a declining stock market continues to escalate. However, one thing is clear: demand for midstream services and MLPs is here to stay. The logic is easy to follow. Regardless of commodity prices, oil and natural gas will always need to get shipped from one place to another via pipelines. Further, other midstream services such as fractionation and storage are essential to making this entire process work.
Sleeping Giants
The master limited partnership (MLP) is the most efficient corporate tax structure for midstream assets. Not only does it eliminate the pitfalls of double taxation of dividends, but it often allows for a built in hedge against inflation. As large institutional investors start to understand how MLPs work, they will realize that the benefits far outweigh any of the potential risks.
The Value Proposition
Currently, because institutional investment remains low, the price variability of LP units is higher than most US large cap stocks. However, for the long term investor who is comfortable with near term risk and is willing to do more work at tax time, the value proposition remains clear: Per the Alerian MLP Index, MLPs have returned an average of 19% annually over the last 5 years, and 16% over the last 10 years.
