John Reese selects stocks based on a detailed historical analysis of the strategies of many of the s...
An 'Energizing' Income Stream
03/05/2013 9:00 am EST
Brian Begley of Atlas Energy explains why master limited partnerships are entering a new era for investors.
Nancy Zambell: My guest today is Brian Begley, the Vice President of Investor Relations at Atlas Energy. Thanks so much for joining me.
Brian Begley: Thanks so much for having me on.
Nancy Zambell: It's a very exciting time in the world of master limited partnerships. We're seeing a lot of expansion in the industry. Why don't you tell us a little about Atlas, Brian?
Brian Begley: The Atlas Companies are involved in the oil and gas business in the US, domestically.
We have two core operations, both on the drilling side-drilling and exploration for oil and gas in several areas in the US, including the Northeastern Region and what we call the Mid-Continent Region in Oklahoma and Texas. We also have a midstream or pipeline infrastructure company that operates in the Mid-Continent Region, as well, in Oklahoma and Texas.
The drilling company is Atlas Resource Partners (ARP). Our pipeline company is Atlas Pipeline Partners (APL). The parent of those two companies, or the general partner, is Atlas Energy (ATLS). All three of those are master limited partnerships.
Nancy Zambell: I know a lot of investors hear about the high dividends that go along with MLPs. Can you tell us, what are the advantages of an investor actually buying shares in an MLP?
Brian Begley: The essence of a master limited partnership was derived years ago. The assets allow investors in an MLP to derive a very high dividend, or distribution. These are high-cash-flow assets-hard assets because they're in the oil and gas business. And because of the growth of these companies, they're able to keep their taxable income very low.
These are all pass-through entities, so if you are an investor in these companies, they look and feel like a normal C-Corp that you would buy on the public market. But you're actually a limited partner in the company, so you're sharing in the profits and losses of the company.
If the taxable income is relatively low and you're getting a high distribution-anywhere from, say, 5% to 8% or 9%-then it's very, very attractive. On top of that, since it is a pass-through entity, the distributions are not taxable dividends. They are tax-deferred, because they are seen as a return of your investment, or a return of capital.
All of those things-the low taxable income, the high distribution, high yield, and also the growth potential for these companies-make the entire MLP class more than an attractive investment.
Nancy Zambell: However, because of something called a recapture, because you are receiving the return of your principal over time, these are not really trading vehicles, are they? I've read that really, you should be married to your MLP. Would you consider that a truthful statement?
Brian Begley: Absolutely, and I think if you speak to any financial advisor looking at the MLP opportunity as an asset in one's portfolio, it really doesn't make sense to hold it for a very short term, because we pay distributions or dividends four times a year.
The growth potential is usually at least 10% to 15% per year for the MLP class. In fact, since 2000, the MLP sector as a group has returned just about 20% per year.
These are certainly long-term investments-very accretive investments for your portfolio-but certainly not something (because of the tax implications that come along with it) that should be daytraded. If you invest only for one day in one of the MLPs, you will receive a K-1 tax form at the end of the year. It makes sense to hold it for a longer time.
Nancy Zambell: Now, there's a difference between upstream companies versus midstream companies. Can you comment on those?
Brian Begley: Absolutely. And there's actually a third component, which would be downstream.
Each MLP in the oil and gas industry or the energy business will be in one of those three buckets. We've got companies in the first two, which is upstream and midstream.
Upstream simply means companies that drill or explore for natural gas or oil anywhere in the US, offshore, or overseas. Midstream refers to those that are involved in getting the hydrocarbons from point A-which is out of the ground-to point B-which is the ultimate end user-whether it be a consumer like you and me or an industry or utility. Those assets can span between pipelines, gathering systems, processing plants that clean the natural gas, storage facilities, and so on.
The third category would be downstream, which would be the ultimate storage facility-refined product storage, or a utility that would ultimately use the product and distribute it to the end user. Our business, and most MLPs, is involved in the upstream and the midstream categories.
Nancy Zambell: The industry currently is really in a great expansion mode, isn't it?
Brian Begley: It is. The last couple of years, it's been in every headline of every major national or local newspaper. You really hear it from people, even on the streets, that [the US] has become one of the world leaders in energy. Critical to the success of the planet are our developments in energy, and making them more efficient and effective as we find new uses and new sources of energy.
In the meantime, we have the ability-as a country-to be almost self-sufficient in oil and gas, with very low dependency on foreign imports. That is very different from the last 50 or 100 years. It's going to be an absolute gamechanger for the company as a global relationship.
An essential part of that is the master limited partnerships that drill and explore for liquids and oil, and natural gas. But also the transportation and the infrastructure for getting these hydrocarbons ultimately to end users, and to ultimately export, is critical.
The demand for these assets is growing substantially. We're really still in the early innings. People think that it's just becoming a mature industry, simply because we have been talking about it quite a bit for the last five or ten years. In fact, we're actually still at the very beginning; we're just still scratching the surface, so it's a very exciting time for MLPs.
And to your point, Nancy, this is even more reason to invest in the MLP class as a long-term investment.
Related Articles on INCOME
Periodic bouts of red ink, or larger declines like 10% corrections and even 20% bear markets, are a ...
For investors searching for higher yields, there is the challenge in analyzing whether dividends are...
Johnson Matthey (JMPLY), the 200-yr old U.K. refiner of gold and platinum metal catalysts which are ...