Master Limited Partnerships

[lawman]

I've never invested in them before primarily because I didn't know about them..I'm looking to replace some maturing C.D.'s with some pipeline companies..Yields are high..Taxes are low...Prices are closer to 52 week low than high and share prices are relatively stable..They are not directly impacted by interest rates or the stock market and the future for natural gas here has never looked brighter.. Seems like a no brainer to me..What am I missing?

[kcowan]

Always keep in mind that the returns are justified by the risks. There are no free lunches. Unless you can see lower risks than the average investor in which case you might have a higher returning window.

[clifp]

As far as I know you aren't missing anything. Both of my income newsletters, recommend them. The good one; the M* dividend investor newsletter has been recommending MLP especially oil and gas ones for a couple of years. Here is what he said in the newsletter a few days ago.
Sorry for the weird formating.

Quote:

New Conundrum: MLP Yields and Energy Prices I can understand why our MLPs had been falling back when crude oil was shooting toward $150/barrel. At some point, rising energy prices reduce consumption,and with it pipeline and propane volumes (even if this force is offset and then some by per-barrel price hikes). But when oil began to beat a hasty retreat—a net positive for those energy businesses that depend on volume rather than price—capital fled the entire energy sector regardless of individual merit. The sellers can’t have it both ways: If rising energy prices are bad, how can falling energy prices be bad too? Of course, there are other factors to consider. Some investors surely worry that a new government next year might tinker with MLP taxation. There is some risk here, but simplification of the tax code is no sure thing no matter who’s in charge. If this happens,I would expect existing MLPs to be grandfathered in (as occurred back in a 1986 tax reform act). Another worrisome point: SemGroup Energy Partners SGLP was crushed after its parent and general partner, SemGroup LP, saw a series of unauthorized commodity trades take it into bankruptcy court. Yet this risk is relatively easy to avoid. Several small MLPs exist quite plainly to serve the operating and financial interests of the general partner; for this reason alone I wouldn’t own them, and I don’t. Seven of our eight MLPs either have publicly traded general partners or are themselves general partners.And the parent of the eighth, Kinder Morgan, is under Rich Kinder’s direct control. I don’t think he’s likely to bankrupt himself with SemGroup-like activities. Then there is the cost of capital issue. When LP unit yields are this high, issuing new equity to fund new construction projects and acquisitions becomes awfully expensive—diminishing the growth potential such expansion permits. If yields stayed this high indefinitely, I’d have to reel in my long-term forecasts for distribution growth. But history suggests yields won’t stay this high (and prices this low) for long. The deep discounts at which our MLPs are trading relative to their fair value estimates (29% on average) is one source of support, but I also put together an index to measure the historic relationship between yields on a basket of LP units and those of 10-year Treasury bonds. You’ll find the resulting chart at the bottom of this page. (have to get the newletter to see it ) In the past, this basket has traded at a yield premium between 0.8 and 4.4 percentage points, 2.5 points on average. Where are we today? 4.2 points. For this basket to return to the average spread, either 10-year Treasury yields would need to shoot to nearly 6%, or MLPs would have to rise nearly 30% across the board (and even faster if distributions continue to grow). Naturally, such statistical relationships can and do evolve over time, and today’s sector bears little resemblance to that of 1993. But this indicator has generated buy signals before, even when the outlook was cloudy. I think it’s doing so again. So while we wait for a rebound in prices, our MLP distributions keep on growing: Kinder Morgan (payout up 16.5% from the second quarter of 2007), Crosstex Energy LP (+10.5%), Buckeye Partners (+6.2%), Buckeye GP Holdings (+24.0%), and Magellan Midstream Holdings (+22.3%) all furnished the quarterly increases I anticipated. With handsome growth continuing, I’m delighted with the role these firms play in the Harvest’s pursuit of large, rising income.

[clifp]

Quote:

Originally Posted by kcowan Always keep in mind that the returns are justified by the risks. There are no free lunches. Unless you can see lower risks than the average investor in which case you might have a higher returning window.

While this is certainly true in general, the market isn't always efficient.

MLP in particular are likely to be a less efficient than other securites.

• With rare exceptions Mutual Funds aren't allow to invest in MLPs this eliminates an important source of funds
• They are a pain in the butt at tax time. At least several of the 22 pages of tax forms I shipped off to the IRS last week are devoted to MLPs (and God forbid Turbotax ever goes out of business.)
• Invested in MLP via an IRA is fraught with tax pitfalls, hence eliminating another source of buyers.
• While the business of oil and gas MLPs is pretty simple the corporate structure is very complicated
• Last but most important most people have never heard of them since there is very little incentive for anybody to sell them.

[haha]

I invest in MLPs, both in the pipeline space, the O&G exploration and production space (only one old timer here), and timber. I also have quite a few corporate pipeline operators which often have MLP subs, and get the GP and IDR interests from these.

I am not real fond of the O&G and pipeline MLP business model that requires frequent trips to the equity markets though. This is one reason I like corporate pipeline operators. Also, long haul pipelines which are often C-corps seem to me to be more stable than the gas processing and gathering business that many MLPs are in. The trade off is a smaller current yield.

One filter I use is big time insider buying- without it, I am not interested. Though others may explain why insider buying is meaningless, I know that I would rather pay attention to a businessman who is laying down millions of his own $$ to own his stock/units, than to some academic with 4 cents in the bank who is telling me that markets are efficient. If I show patience it works. In over 30 years of investing almost exclusively in individual securites, 100s of trades, I have only had one bk when I had checked yes in the "Insider Buying?" box.

I really don't understand the current O&G and pipeline MLP weakness either- if I did I might own more of these-but I've been around long enough to know that often there is no reason- just BS blowing in the wind. My timber MLP is not weak. And neither are my C-Corp pipelines. So my guess is that it has something to do with too much capital demand in too short a time when capital is hard to come by for risky projects.

ha

[JockStrap]

Quote:

Originally Posted by lawman I've never invested in them before primarily because I didn't know about them..I'm looking to replace some maturing C.D.'s with some pipeline companies..Yields are high..Taxes are low...Prices are closer to 52 week low than high and share prices are relatively stable..They are not directly impacted by interest rates or the stock market and the future for natural gas here has never looked brighter.. Seems like a no brainer to me..What am I missing?

go the forums at bogleheads.org.....run a search for MLPs.there are some very good, recent threads...There are a few people on that forum that are experts in MLPs..Myself, I've allocated 5% of my portfolio to energy MLPs since they have attractive returns with low correlations to stocks...this is the only portion of my portfolio that consists of individual securities..however, there are some MLP funds..like I said, look at the threads on bogleheads.org here is the link for a very informative thread


http://www.bogleheads.org/forum/view...0104&highlight=

[lawman]

What are C-Corp pipelines?
Can you give an example of one or more that you like?

[haha]

Quote:

Originally Posted by lawman What are C-Corp pipelines? Can you give an example of one or more that you like?

I can give you a few names that I may or may not own, now or in the future. Note that most of them have other businesses, like E&P or in some cases gas distribution utility companies. These other businesses really can affect how much commodity price sensitivity these things display, as well as other drivers of performance. These are in principle simple businesses, but not so simple when you get down to it- at least not for me. If you don't enjoy the chase, I think I would look for some exposure in a mutual fund or CEF, and leave it at that.

Enbridge, Transcanada, Spectra Energy, Southwestern Gas, Equitable Resources, Atlas America, El Paso, Questar, Oneok, Williams Company. There are others.

There is a lot of know about these businesses, much of which I am still learning, so I hesitate to recommend anything. Once I do that I start wanting to appear smart, or consistent or whatever, and I would rather my attention focus solely on trying to get it right day to day in the markets.

Ha

[hillstreet]

Suggest researching Medical Properties Trust. (MPW)It has pretty much held steady during the downturn and has approx. 10 per cent yield on the dividend. It also is not subject to the oil and gas volatility. It is a Healthcare facilities investment entity with potential stability with the aging of America. It sells for approx. $10 to $11 per share. This is not a recommendation to buy, as I am not a financial planner. I personally have owned MPW for almost 1 year. I like the dividend when
CD's are around 3 per cent.

[lawman]

Quote:

Originally Posted by hillstreet Suggest researching Medical Properties Trust. (MPW)It has pretty much held steady during the downturn and has approx. 10 per cent yield on the dividend. It also is not subject to the oil and gas volatility. It is a Healthcare facilities investment entity with potential stability with the aging of America. It sells for approx. $10 to $11 per share. This is not a recommendation to buy, as I am not a financial planner. I personally have owned MPW for almost 1 year. I like the dividend when CD's are around 3 per cent.

Thanks..Looks good..I've added it to my prospect list..

[huskerblue]

As stated, good luck at tax time. Besides the complexity, it is a rare MLP that doesn't send you your K-1 about April 15th adding to an already aggravating time of the year.

[hobbes44]

To avoid the tax hassles with MLPs, invest in one of the new mutual funds that actually holds MLPs.

Some firms to check include:
Fiduciary/Claymore MLP Opportunity Fund
Kayne Anderson MLP Investment
Tortoise Capital Advisors

[clifp]

Quote:

Originally Posted by huskerblue As stated, good luck at tax time. Besides the complexity, it is a rare MLP that doesn't send you your K-1 about April 15th adding to an already aggravating time of the year.

MLP certainly are more complex and yes you might as well just be prepared for last minute tax filing, or do what I do and just file an automatic extension each year. I just finished my taxes a couple of weeks ago. I had 7 K1 from MLP, 2 new ones, and the rest from previous years. At most I spent 1 hour filing out the paperwork via Turbo Tax, which automatically tracks the "basis" for the partnerships.

Compared to the tax forms needed to account for renting the downstairs of the house, K1 are a piece of cake.