5 Top-Ranked MLPs For Investors Playing A 2018 Rebound

The surge in oil and natural gas production over the past few years have made pipelines, storage and associated energy infrastructure master limited partnerships (or MLPs) attractive bets in the energy midstream space. This is because these network providers derive a major portion of their revenues from fee-based contracts based on volume and are largely insensitive to commodity price fluctuations.

The Business of MLPs

MLPs differ from regular stocks in that interests in them are referred to as units and the unitholders (not shareholders) are partners in the business. Importantly, these hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities.

Finally, the assets that these partnerships own – oil and natural gas pipelines and storage facilities – typically bring in stable fee-based revenues and have limited, if any, direct commodity-price exposure. This enables these MLPs to pay out fairly growing distributions.

Advantages of the MLP Structure

Higher Returns: MLPs represent an attractive investment option for income-focused investors in the current environment. In addition to high yields, MLPs are structured as pass-through entities.

This means that they typically distribute nearly all of their cash flows back to unitholders. The MLPs are not required to pay a corporate income tax as the tax liability of the entity is passed on to its owners (or unitholders) in the form of a cash dividend (distribution). This allows the MLPs to offer very attractive yields to the investors.

Low Risk: Most MLPs are involved in processing and transportation of energy commodities such as natural gas, crude oil, and refined products, under long-term contracts. As such they have relatively consistent and predictable cash flows, unlike exploration and production (E&P) companies, whose profits are highly correlated with commodity prices.

Like all high-income products, MLPs also tend to react negatively to rise in interest rates initially. But research shows there is no material correlation between 10-year treasury rates and Alerian MLP index performance in the longer-term.

One of the reasons is that many MLPs use fixed rate debt for majority of their borrowings. Another reason could be that investors hold MLPs for a long time due to tax consequences and thus they do not have a significant adverse reaction to rising interest rates unlike other rate sensitive assets like utilities and REITs.

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