Energy Master Limited Partnerships Go Mainstream: Baird's Ethan Bellamy

As Robert W. Baird & Co.'s Ethan Bellamy explains, master limited partnerships (MLPs) are yield-producing investments that can bring remarkable returns to smart investors and provide short-term buy-sell profits. In this interview with The Energy Report, Bellamy discusses a fistful of partnerships worth an investor's dollars.


The Energy Report: Ethan, your firm covers a lucrative space in the natural resources sector, master limited partnerships (MLPs). Would you briefly describe this investment vehicle?

Ethan Bellamy: Master limited partnerships are a subset of publicly traded partnerships that have been around since the tax reform of the late 1980s. They serve businesses that extract and transport energy in the United States. They also may generate qualifying income sources in rents and dividends.

TER: How do MLPs differ from other types of partnerships?

EB: MLPs are publicly traded. They get the liquidity benefits of publicly traded securities, coupled with the tax efficiencies and merits of a partnership. The tax structure eliminates the double taxation of dividends. There is no layer of taxation at the entity level, and the tax only occurs at the limited partner level. It is sometimes misconstrued that MLPs are tax-free. In fact, they are not. They are taxed at the unit holder level. But they have a net present value pick-up that one does not find in regular investments.

TER: Why are most MLPs in energy and real estate? Why isn't the form used more universally?

EB: In the late 1980s, Winchell's Donuts and the New York Knicks and a bunch of non-energy businesses converted into the MLP structure to make their businesses more tax-efficient and investable. Congress elected to wall off the MLP structure to a subset of extractive resources to prevent the erosion of the corporate tax space. The MLP space was subsequently expanded to include biofuels and logistics. There is a move afoot to expand the sector to include renewable energy sources.

TER: Is that a good move?

EB: Renewables deserve a level playing field. I would welcome any cash-flowing businesses with good yield characteristics that can diversify the energy sector.

TER: Energy MLPs have been seriously outperforming utility stocks and many other energy investment vehicles during the last five years. Why?

EB: There are two main reasons. First, the Federal Reserve's aggressive monetary policy propped up anything with a yield handle. MLPs are just one of the many beneficiaries of the Fed's accommodative policy. Equity owner-yielded securities have done particularly well.

"MLPs get the liquidity benefits of publicly traded securities, coupled with the tax efficiencies and merits of a partnership."

The second reason is a more specific energy variable, which is the resource expansion brought about by hydraulic fracturing and horizontal drilling. Three-dimensional seismic design and a host of new technologies have potentially unlocked vast global resources. But the United States and Canada are the only places, so far, where these technologies have been employed to great economic effect.

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1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and ...

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