Energy Master Limited Partnerships or MLP Funds?

[Searcher7]

I like the very nice yields of energy Master Limited Partnerships and am looking to buy some more. I would appreciate obtaining input concerning the pros and cons of buying the individual units or buying one or more of the MLP funds. According to www.mlpfunds.com, some of the funds are trading at a discount to the MLP units in their portfolios. Apparently, the tax reporting for the funds is much simpler, too.

Any suggestions would be appreciated.

 

[REWahoo]

Searcher7,

You very well may be an individual investor seeking advice and opinions from this board, but your initial post creates some doubt as to your actual intent:

- The wording of your post can easily be interpreted as a soft sell for MLP's
- The website you link is questionable as to it's bias toward MLP's and appears to be a thinly-veiled sales pitch for BGR.
- This is your first post, and many of us on the board have been down this road before with spammers attempting to use this forum to sell something.

If you continue to post here expect to have to do some convincing that you are what you say you are, someone just looking for advice on an investment. If that is the case, welcome. If not, please don't waste your time posting here again.

REW

 

[Nords]

He's been posting at M* & FundAlarm too, so he'll find an answer.

http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000098&convId=151629

http://66.223.18.76/wwwboard/messages/120053.html

 

[Searcher7]

I recieved some good information on the Morningstar board. Still hoping for help here but I know MLPs are a lot more complicated than bank CDs, money market funds, etc., so I certainly understand if you can't be of help. Thank you for your consideration.

 

[REWahoo]

I recieved some good information on the Morningstar board. Still hoping for help here but I know MLPs are a lot more complicated than bank CDs, money market funds, etc., so I certainly understand if you can't be of help. Thank you for your consideration.

I think we have just been insulted....

REW

 

[brewer12345]

I recieved some good information on the Morningstar board. Still hoping for help here but I know MLPs are a lot more complicated than bank CDs, money market funds, etc., so I certainly understand if you can't be of help. Thank you for your consideration.

I think most of the funds use leverage, which doesn't thrill me. You also lose the tax advabtages of the MLP structure, although you also lose the headaches of dealing with K-1s. I suppose I might be interested in one of these funds at a 10% or better discount to NAC if the expense ratio were less than 1.5%, but that's it.

I have invested in MLPs in the past. Until it blew up, I owned SGU. I recently sold SPH because it looked very expensive to me. I still own STON. The energy sector as a whole looks somewhat dependent on commodity prices staying high. I don't know if they will or not, but I would prefer to avoid making a big bet either way.

MLPs are a good vehicle for tax purposes, but they are a PITA when it is time to file your taxes. With dividend tax rates so low, I'm not sure it is worth the aggro. I bought EGLE with the proceeds of my SPH investment because A) it looked very cheap and B) it will pay out about 14% dividend yield without have to wrestle with a K1.

 

[Searcher7]

Thank you very much for your informative help, Brewer.

I share your concern about M.L.P. fund leverage. After reading the fund SEC filings and reports, it looks like FEN, FMO and KYN use “traditional” leverage strategies that often employ the issuance of preferred shares which tend to be very interest-rate-sensitive which concerns me - especially as we may be approaching an inverted yield curve.

BGR and KYN apparently haven’t issued preferred shares but can write put or call options on securities held by the fund. I believe this is technically a form of leverage.

You aptly point out the loss of tax advantages by holding MLP funds while they offer the advantages of tax headache reduction. Based on your views, which I share, the MLP funds would probably be a better fit in an investor’s taxable accounts.

You offer wise counsel about fund discounts and expenses. The discounts and premiums have been moving around a lot and some funds’ expenses seem high to me as well.

Your experience with SGU blowing up confirms the importance of diversification.

Couldn’t agree more with your assessment about the dependence of the energy sector on oil and gas prices. I’m a firm believer that life and investments tend to go in cycles so another dip will probably happen sooner or later as long as (if?) supply catches up with world demand.

Your 14 percent yield on SPH sound awesome. From your perspective as an owner of a dry bulk shipping company I would be interested in your thoughts about what is causing the huge drop in the Baltic Dry Shipping rates…

http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

I am trying to figure out if its drop is a leading indicator of a slowdown in Asia or, perhaps, the supply of ships increasing to meet the high demand.

Thanks again for your thoughtful comments.

 

[Ed_The_Gypsy]

A friend sunk money into a partnership to drill oil wells. When the wells produced, the majority owner pumped until initial costs were covered, then they shut them in, so the minority partners got screwed. The idea, as near as we can tell, is to out-wait the minority owners and restart production after they are dead or something.

I do not like fancy investments. If they are complex, there is a reason for that and I don't think that it will be in my best interest. If I can't understand it, I stay away.

Ed The Dummy.

 

[brewer12345]

From your perspective as an owner of a dry bulk shipping company I would be interested in your thoughts about what is causing the huge drop in the Baltic Dry Shipping rates…

http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

I am trying to figure out if its drop is a leading indicator of a slowdown in Asia or, perhaps, the supply of ships increasing to meet the high demand.

There is no new supply of ships coming on, since all the shipyard capacity is spoken for for years, and the yards are concentrating on oil tankers because they are more profitable. I think the declines are being caused by a seasonal slowdown (typical in the shipping industry: Scandinavians go away in July, Greeks go away in August), and by a "sell-off" after records reached at the end of last year. I've little doubt things will pick up again later in the year. In any case, EGLE has locked in charter rates for at least the next year, so they are sheltered in the meantime.

 

[Searcher7]

Great call, Brewer!

Wanted to follow-up on Brewer's suggestion that shipping would remain strong. Ever since Brewer's post the Baltic Dry Index has turned around and headed back up. Thank you for sharing your insights!

 

[brewer12345]

Re: Great call, Brewer!

Wanted to follow-up on Brewer's suggestion that shipping would remain strong. Ever since Brewer's post the Baltic Dry Index has turned around and headed back up. Thank you for sharing your insights!

Just lucky on my part, I suspect. Actually, if you look at the dry index and the Handymax index (longest record), they all tend to turn up toward the end of the summer pretty much every year. Doesn't stop investors from panicking, though.

 

[brewer12345]

Just an update: Looks like the market has figured out that EGLE exists and is starting to bid it up. Still cheap at today's prices, IMO. DRYS also looks pretty cheap, although I think they are likely to prove more volatile than EGLE.