Curious if anyone has considered the alternatives when trying to buy a fund of MLP. The options that I’m aware of (besides individually buying a ton) is an ETF, mutual fund, or ETN. The ETF and mutual fund have high(er) expense ratios than the underlying if they have a significant investments in MLPs. ETNs on the otherhand are unsecured notes that pay the return of the index, resulting in credit risk in addition to the investment risk. Mutual funds/ETF look like they are taxed differently than ETNs as well. Curious if anyone here has thoughts or insights in these various structures
Yea,but the downside is that ETFs that hold significant amounts of MLPs have to pay corporate income tax on it. Making the returns significantly lower due to the tax bill. ETFs are only preferable in bear markets, in my understanding. In neutral/bull, they’d underperform ETNs. But don’t have that credit risk
A lot of money is relative, but the positions will be large enough for me to want to do it. I’m not concerned with yield really, just want exposure to some of the specific things going on in the economy. The outlook looks good IMO
^^Yeah, I was thinking about this last night. (First, I don’t know anything at all about ETN’s, so I will disregard them.)
The ETF will underperform its index, mainly due to the corporate tax, but also partly because the MLP’s are distributing money based on DCF, or Distributable Cash Flow, which is always more than earnings. (DCF doesn’t have depreciation and tax charges.) In fact, the ETF lags the index by about 8%, if I’m not mistaken.
However, you’re still paying tax on the income, even if it’s not distributed. (I don’t know that this is a big deal with most of these, though. In my experience, they pay out even if there’s a net business loss.) Plus, you’re paying at ordinary income tax rates, which can run as high as 44%. (With the ETF, you’re only paying 15%, albeit on a lot less income.) Plus, when you sell, you’ll have to deal with depreciation recapture, which is taxed at ordinary tax rates. (Don’t have this problem with the ETF.)
Plus, when you give the K-1 to me, your CPA, I’m going to have to figure all this out, which will cost you anywhere between $25 and $300, depending on how complex it is. That’s not much money if you’ve got $100,000 invested in it and it’s churning out an 8% yield, but if you’ve got $1000 invested in it, then just your tax bill alone can cost you up to 3%. (That’s 3% of 8%, or almost 40% of your return.) If you give me a 1099, it costs virtually nothing.
I have friends involved in the business or working in the several areas (Gulf, Texas, North Dokota). It’s clear that there is not only a lot of stuff being moved now, but a need for a lot more of the infrastructure. I’ve been doing some reading on various funds and the expected amounts of pipeline they expect to have to build.
And remember, MLPs can do product as well like upstream MLPs. It’s not limited to transport.
I know, but the bulk is transport. Are you familiar with tolling models and how pipelines charge? There is some interest rate sensitivity in the business. I’m not saying its bad, but just pointing out the risk. There is also execution risk on building new pipe. Its getting more expensive along with demand. Owning a pipe maker or construction contractor might be a better way to tap that. I’m much more interested in upstream and services myself. That’s where the big bucks are made.
Yes, the pipelines have some risk – which is why I’m seaking out an index approach to it. The pipe markers and construction contractors are good, but then again there is significant risk in that as well. One of the things I find favorable about MLPs is the tax situation with them. It keeps some retail money out of the space. Plus I think based on my current research the fundamental are sound. But I haven’t finished researching yet, as I’m new-ish to this space.
I did go long VNR after their recent earnings miss, which is an upstream provider of mostly natural gas but some oil and LNG. But they are right below distribution coverage and it isn’t a move without risk – especially if LNG prices do not recover. But I’m comftorable with thier hedging strategy of interest rate and price risk while really thinking they have solid management team. I think some of their problems with new projects are behind them and they’ll be able to recover, but time will tell. I wish they’d start hedging LNG.
I’ll take a look at VNR, looks interesting. Canadian upstream yield play to check out is SGY (on TSX). Disclosure is I’m long it and I’m long it a lot cheaper than it is today. Still a handsome yield, much of it hedged. Good managers and execution has been great. I think the OTC ticker is ZPTAF. Not sure as I have it in Toronto. And SGY is just straight dividends, no funny tax. I think you face a 15% withholding as an American??? Dunno
In giving the project, known as Freeport LNG, the green light, the Department of Energy signaled that it found the prospective benefits from exporting energy outweighed concerns about possible downsides for the U.S. economy.
The Freeport terminal is the second export facility approved by the Obama administration. Cheniere Energy Inc. LNG +1.74% 's Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements. It expects to begin exporting in 2015
One way to own MLPs without having to file the K-1 is with institutional shares. They are special corporate entities used for just this purpose. There aren’t many. The way they circumvent the K-1 is by paying their distribution in shares instead of cash. They usually yield a bit more than normal MLPs as well. I owned KMR (one such entity) before the Kinder consolidation. It was great…roughly ~7% drip with some capital appreciation and then the 25% bump at the consolidation. Never filed a K-1.
I’m always surprised how few people know about it when I talk to US equity investors.
I also agree with rawraw that you can now pretty much buy LNG asset rich companies and hold them until the price goes up. It’s not a matter of if, but when.
I was reading about those but if I recall, there is only like 3 of them that exist. I would be interested in it, because the income isn’t my main reason to invest and having it reinvested automatically is fine by me. And I’m surprised how few people follow MLP as well, especially given what is going on in the economy. But I view that as a good thing, let them keep bidding up the S&P.
The problem with LNG is it is hard to hedge. But I’m hoping that gets easier as the markets get more liquidity
The tolling model is mostly fee based based on volume with minimum commitments. If inflation rise, the amount they charge to transport rises. So interest rate risk should be negligible. That being said, the market does react negatively in the short term if rates rise, but they bounce up pretty fast since their dcf juss rises in tandem with it.
Execution risk also is company specific. Most are prudent. They arent going to build if there is no demand and upstream will only build if they believe there are sufficient reserves. So when they build a pipeline it is typically profitable and because of the profitability, the cost of building pipe is rising and the risk of overbuilding is concerning since everyone is trying to build. One CEO said that they dont care about costs when they build out pipeline since it is profitable enough. Retarded thing to say, but that is the current mind set if there is demand.
Upstream is more profitable, but more risky. Midstream infrastrcuture has higher multiples than upstream for its stable cash flows and minimum commitments. Basically if a mistream builds pipelines, there is usually something accretive since even the minimum commitments guarantees they will make money on the project unless the upstream peepz default on contract.
A MLP by definition uses a K1. The 1099 comes from ETFs or other structures, which often eat into returns due to tax things mentioned above. There are the MLP’s that were mentioned that pay distributions in shares, but those are rare.