Oil & Gas

Anyone here long/short oil or natural gas?


I went long VNR after their recent earnings miss and less than 1 coverage ratio. From what I’ve seen so far, they tend to be run well. Figured this bad streak was a good entry point, given natural gas price weakness lately

Long a couple producers and a service co. All very small cap, yield focused. I live in the heart of oil and gas so a big downturn in oil prices is not only bad for my portfolio but my house and salary. I believe in the sector, but can’t over commit.

Yea, bad idea to have extremely high correlations like that. Which areas in the sector are you most bullish on?

Bro, you have no idea.

I live in the middle of the heart of o&g, and we (unlike those in Houston or OKC) have absolutely no diversity in our economy. And being a tax return preparer, I see lots of brokerage statements and lots of portfolios.

It is truly amazing to me how many people in the Permian Basin take the money that’s in their brokerage account, and knowingly invest it in these shitty MLP’s, simply because some broker told them that it has higher yield. It does, but at what cost? Depreciation recapture? Increased tax prep fees due to me having to figure out your K-1? Ordinary income tax rates vs. capital gains/dividend rates?

Why anybody out here would voluntarily subject their portfolio to the exact same forces that drive your house prices, salary, and overall standard of living, I have no idea. It’s kinda like the guy who works for Enron and puts all his 401k into Enron stock.

It may have to do with the fact they are familiar with it, so it’s less scary (but doesn’t make it less risky)

Yeah, I live in what’s pretty much the Canadian equivalent of where you live. Complete with world class rodeo, pickup trucks and all that. Nil diversification (our tech sector makes exploration software).

I work in the energy industry and my exposure to industry investments is a position in Shell and an MLP ETF. Ain’t nobody got time for K1s for a position the size of mine.

Granted I’m compliance restricted from entering/exiting positions in the industry without preapproval, which is the main reason I don’t play more in the area. ETFs are exempt.

^ Curious: do you need to do a K-1 for flow through holdings in a 401(k) or a Roth?

Up here we don’t need to worry about the intricaties of such reporting if in a registered (tax-free/tax-deferred) account. Hence MLP-like stuff gets shoved in the RRSP and simple stuff stays in the non-registered.

Geo, I have no idea your age range, but how hard did you or your parents get hit in the early 80s? Alberta was in a depression.

A lot of providors are getting good with the K1s, where you can import them into tax software.

It’s basically the same here from what I know. They still provide a K-1 but you don’t have to do anything with it when you file your taxes.

the only reason im in jmlp is because its not a k-1 its a 1099, might be the new way to go with MLP

I lived in Ontario in the 80’s. Back then Alberta was just a bunch of redneck hicks to me - actually I felt this until a few years after I moved here (now Alberta has two young progressive mayors leading their cities and Toronto has Rob Ford).

If your IRA invests in an MLP, it becomes a limited partner in that MLP, just as you would if you invested directly. Because an MLP, like all partnerships, is a pass-through entity (no tax paid by the partnership, all tax items flow through to the limited partners/shareholders, who pay tax on their share), the partners are treated by the tax code as if they are directly earning the MLP’s income. Thus, as a partner in the MLP, the IRA or other account is considered to be “earning” its share of the MLP’s business income. The MLP’s business is not related to the retirement account’s tax-exempt purpose; therefore the IRA’s share of the MLP’s income is treated as UBTI and is taxed accordingly.

The tax is owed on the retirement account’s share of the MLP’s taxable business income, minus its share of depreciation and other deductions related to the business, as reported on the K-1 form ( not on the quarterly distributions). The K-1 contains a line reporting how much UBTI the MLP is passing through. The tax rate is the highest tax rate for a trust, currently 39.6%. There is a deduction that covers the first $1,000 of UBTI from all sources; after that, the retirement account will owe tax.

It is important to remember that you are not the one who will owe any unrelated business income tax on MLP units held in your retirement account. The tax is owed by the IRA or other retirement account itself, as it is the partner in the MLP. It is the responsibility of the custodian of the account to file a tax return (form 990-T) and pay any tax owed out of the account’s funds.

^ That’s awful tax treatment. I’ll need to brush up on what it means for me holding an American MLP in an RRSP/TFSA…

EDIT/UPDATE: US source MLP distributions seem to have a 35% withholding when paid to Canadians, which is not deductible against Canadian taxes if in a TFSA/RRSP. Just from what I can tell from brief research, no tax expert.

^ that reinforces why I only invest via an ETF which reports on a 1099. Ain nobody got time for that!

And for geo, it isn’t just you. Any tax withholdings from things held in a tax deferred account here don’t qualify for a foreign tax credit. To qualify for a foreign tax credit, the investment must be held in a taxable account.

^ Right. Thankfully Canada and the US have a tax treaty and there are no withholding taxes on dividends or capital gains in an RRSP (though there is in the TFSA/Roth equivalent). The MLP structure doesn’t qualify under this treaty and so the 35% withholding nails you.

Don’t know that I understand your question.

The company files K-1’s, and distributes them to the owners, and the owners report them on their tax returns. So, for example, Enterprise Products Partners (an MLP) will still issue me a K-1, regardless of whether it’s in an IRA or in a nonqualified account.

So if I own EPP as part of my nonqualified brokerage account, when I get the K-1, I’ll put the business income on Sch. E page 2, the interest and dividends on Sch. B, etc.

However, if I own EPP in my IRA, I don’t have to do anything with the K-1, since I won’t pay tax on it. I can just ignore the K-1 altogether.

Did that answer your question?