Mastering MLPs

01/18/2012 10:30 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Low interest rates and tax-advantaged dividends are a winning combination for these operators of energy infrastructure, says Roger Conrad of Utility Forecaster in this exclusive interview with

In the investing world, you may have heard the term MLP as an investment opportunity, but what does that mean? How does it work? Our guest today is Roger Conrad to talk about that. Roger, first of all what is MLP? What does it stand for?

Master Limited Partnerships, and it’s basically a tax construct that allows them to pass through a large amount of income directly to the investor, who is known as a unitholder rather than a shareholder. It’s all about dividends. It’s all about dividend growth.

But there’s a tremendous model for success with these companies. Right now, corporate borrowing rates are the lowest levels in decades, and these companies have done a pretty good job raising equity as well.

What they do is they go they find a project, and as we develop shale reserves particularly in the United States—as we develop natural gas liquids and so forth—there has to be pipelines, fractionators, gas gathering assets. A whole range of infrastructure has to be constructed.

These companies are able to basically locate projects and execute them, and sign up—basically, when they build a pipeline they have almost full subscription before they even start building it, and it goes into dividends. It goes into higher share prices. A very nice formula.

Some of these companies have raised dividends 28 quarters in a row and more, so that covers a lot of territory. Very steady business models. Lots of good growth.

Do they trade on a stock exchange?

They do. The majority will trade in New York, so plenty of liquidity.

They’re still a pretty small part of the investing universe. If you look at the 50 largest and take their entire market value, it’s roughly half that of Exxon Mobil (XOM). So it’s a small area and it’s a growing area.

I should also say that there are tax advantages if you hold them outside an IRA, in that you can literally with many of them not pay any tax in the year you receive a dividend. It’s considered return of capital.

It’s an accounting construct. It doesn’t mean that the investment’s unwinding or anything, but it does mean you don’t pay taxes until you sell the security…and in some cases you can actually will them to your heirs, and at that point there’s a step-up in cost basis so you can literally not pay any taxes at all.

Alright. So from what you said, I take it that these are mostly oil and gas exploration companies.

That’s a segment of it. The ones that appeal to me the most, though, would be pipelines. They’re companies that just earn a straight fee.

They’re not so dependent on energy prices and that type of issue, not vulnerable to the changes in commodity prices, but just really steady where they put a new project into works, and it increases cash flow, increases dividend, and the share price goes up.

Alright. Do you have a favorite that you’d maybe give us that might be a good investment?

Well, I think the blue chip of the industry, unquestioned, is Enterprise Products Partners (EPD). It’s the biggest, and they can pretty much get into any project they want. They actually have a 58-year debt that has a yield of maturity right around 6%—so it’s just ridiculous how cheaply they’re able to issue capital to get these projects going.

But it’s a very steady business model. They actually increased their dividend throughout 2008, when oil prices went from well over $150 down at one point to less than $30, so it’s a very resilient business model as well.

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