Archive for August, 2008
Friday, August 8th, 2008
The Master Limited Partnership (MLP) has two key components. At the core of the MLP is the General Partner (GP), which actually runs daily operations (e.g., physical management of a pipeline, billing, accounting, etc.) Limited Partners (LPs), on the other hand, are passive investors in the business and have no part in daily operations. The goal of the GP is to grow cash distributions (similar to a stock dividend) to the LPs and, since most MLPs operate in the energy space, these distributions tend to grow steadily over time. (more…)
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Wednesday, August 6th, 2008
Standard & Poors has a pretty good article on its website outlining the basics of MLPs. Of particular interest is the low correlation of MLP returns with those of stocks and bonds. For those not familiar with asset allocation theory, combining investment classes that have low correlations with each other is a good way to remain diversified. Further, it can allow you to boost returns while actually lowering portfolio risk.
Related Links:
Standard & Poors MLP Primer
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Monday, August 4th, 2008
MLPs have several advantages that make them appealing investments. One key advantage is the absence of double taxation when it comes to paying dividends to investors. Common stockholders, for example, are essentially taxed twice on company earnings: once at the corporate level (the company itself has to pay taxes to the US government on earnings) and again when they receive dividend payments.
MLP unitholders, however, only pay taxes when they receive a dividend payment (called a “distribution”). Further, MLPs can defer paying taxes on the majority of the distribution until the units are actually sold. Not bad, eh?
Always Know the Downside
Don’t forget to do your research. In some cases, MLP unitholders may have to pay taxes in each state where the partnership operates. I strongly encourage everyone to consult a tax advisor before attempting to invest in these vehicles. They can be great investments only if you do the research and follow the rules.
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Sunday, August 3rd, 2008
Many investors assume, incorrectly, that fluctuations in oil & gas prices can significantly impact MLP unit prices. However, the truth is that revenue from MLP assets (the majority of which are pipelines) is generated from a “toll road” model. That is, it doesn’t matter how expensive the commodity shipped is - it only matters how much of it gets shipped. Of course, high (or low) prices can impact the amount shipped - but energy demand has been growing fairly consistently over time.
A good analogy is, unsurprisingly, an actual toll road. It doesn’t matter if 100 Honda Civics use the road or 100 Aston Martins - the same toll is collected and, consequently, the same amount of revenue.
Posted in MLPs, Midstream MLPs | No Comments »
Saturday, August 2nd, 2008
It’s been a rough year for the markets, as major equity indexes suffered significant losses in the wake of subprime lending, rising inflation, and slowing economic growth. So it’s no surprise that publicly traded MLPs have also had their share of bad luck lately. However, as with any investment, there is risk involved. SemGroup Energy Partners is a good example of why investors should always understand the potential downside involved when investing in MLPs. (more…)
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