Should You Hold MLPs for Life?

02/20/2013 8:30 am EST

Focus: MLPS

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Some investors believe MLPs are lifetime income investments, and the advice on the matter from Roger Conrad may be more surprising than you think.

My guest today is Roger Conrad, and we’re talking about Master Limited Partnerships in the energy sector. Hi, Roger, and thanks for being here.

Hi. Thank you.

I understand the MLP sector is really growing a lot, especially in energy...of course, most of the MLPs are energy-oriented companies. Can you talk a little bit about that, and what you see as the potential for this year?

Well, we’ve had a pretty good four years, and often that means that the next years know, you’ve come to the end of the road. I don’t think that’s the case with these.

There have been a couple of big issues that have been overhanging them, one being energy prices. Even though the pipeline companies have locked in revenue, and they’re not so dependent on what happens in energy prices, they move around with energy prices. Ultimately, the kind of projects they depend on...depend on producers being willing to drill, which of course depends on energy price. That’s been an issue.

The taxation issue has been another thing, particularly with the budget crisis and the idea of perhaps some tax reform. A lot of people have worried that MLPs might wind up being taxed. We saw a lot of selling at the end of last year. Some of that has reversed.

But I think the big driver going forward of this industry is going to be just the huge shortage of infrastructure in the United States to bring oil, gas, and natural gas liquids to market from the well. A lot of the energy that has been recently tapped into—shale energy—is not really in traditional areas where there is pipeline infrastructure. A lot needs to be built.

The volatile market for energy prices has kind of stretched out the period for building it, but as these companies build projects—and the US is projected to be the highest producer of oil by 2020, by the Energy Information Administration—even if it just goes part of the way there, there’s going to have to be a lot of pipelines, a lot of processing, a lot of storage built.

That’s really the opportunity. The more these companies build things, the more cash flow rises, the more they can increase distributions, and that’s the primary driver of the share prices. I don’t see any end to that dividend-paying machine.

Yeah, they’re great dividends. What do you tell your subscribers in terms of how long to hold these MLPs, because you run the risk with this recapture tax, right, that can be pretty significant? I’ve read that some people say just look at them as a lifetime holding. What is your view on that?

Well, I think that that’s probably a good way to look at it, provided the underlying business is still sound. I mean, I think it’s a mistake to let the tax decision dictate buying or selling a stock, if it's a good company. But for the most part, yes, I think.

And if you look at our model portfolio and our MLP Profits advisory, we pretty much have held most of the stock since the beginning. We’ve added some along the way, but the idea is to buy and hold.

Like you said, there are tax consequences, to that’s another good reason to hold on. You can also at this point, there’s a step-up when you will these MLPs to your heirs, say that you hold them that long.

That is for life.

Yeah, exactly. So, they wouldn’t pay a tax; their cost basis would adjust.

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