Oil MLPs

1. You buy in to a capital share.
2. They are not publicly traded.
3. You generally receive a dividend, and a capital payout (hopefully at a profit) when it is sold at a later date.
4. You will receive a schedule K1 for tax purposes.

It's like you own part of a company but you don't have to do anything.
 
Advantages:

1. Value unaffected by stock market. Obviously oil prices have an effect.
2. Generally higher return than energy stocks.
3. Potential tax offsets for "passive losses." I think that's the term.

Disadvantages:

1. Not liquid, you're usually tied in for a period of years.
2. More directly impacted by company mismanagement and/or poor performance.
3. Considered risky.
 
Thanks, that was exactly what I was looking for. So oil is at a low now, would this be a good time to buy? How is the liquidity determined? Do they have a term? Complete neophyte here, trying to figure this out.
 
PaulS said:
Thanks, that was exactly what I was looking for. So oil is at a low now, would this be a good time to buy? How is the liquidity determined? Do they have a term? Complete neophyte here, trying to figure this out.
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In terms of timing, profits will be greater obviously when oil is high but these are funded capital investments, so the buy cost is determined by the cost of acquisition and operation, e.g. buying or drilling oil wells, and operating them, not the cost of oil.

You are actually buying stock of a closely held corporation, with buy/sell restrictions on the stock. Unlike publicly traded stock, you can't just sell it and dump it if you feel like doing so. Typically they will plan to operate and issue dividends to shareholders at a planned rate of return for a period of some number of years, and then sell the operations (hopefully at a profit) at the end of the term. The planned dividend amount and sell point are published in the prospectus.

But you don't just buy in to these things on your own. You will do this through a broker or financial adviser. The holding might be in a managed investment account (i.e. Schwab, Ameritrade, etc.) or it might be separate. The broker/financial adviser can give you the stats on whatever partnerships are available at the time.

Also note these have a closing period. They will offer "slots", or units of stock, and once all the units (or at least enough of the units have been purchased to fund the operation) the purchase period will close and no more units will be available for purchase after that date, fixing the stock valuation.
 
Also note that MLP's are not limited to oil, there are other industries, e.g. health care, real estate, etc... which also represent attractive opportunities for these types of investments.
 
Look carefully at the specific sector within the the oil and gas industry. Some MLPs are upstream, most are midstream (pipelines, infrastructure). Of the midstream players, their sensitivity to prices can vary dramatically. Some are fee based and some get a % of sales price (thus exposing them to commodity prices).

Be very careful. MLPs must grow to stay alive. That means access to cheap capital. In order to support their distributions, they typically heavily hedge their price exposure and use a lot of debt. When prices drop and interest rates rise, they get hurt and have to cut distributions. That's where they are now. For some, it could be a great time to buy. For others, they may be looking at bankruptcy.

Another thing to consider...unless you're buying a big position, it may not be worth the hassle on your tax return if you're a do-it-yourself type of tax return guy. The K-1s can be confusing to the non-CPA.

Also, many of them are publicly traded. You can look at their historical performance to get a feel for their situation.
 
I think we are talking about a different animal if it is publicly traded. The whole point of an MLP is to not be on the market.
 
Sounds similar to the craps table.
 
some mistakes in the posts above

the whole point of an MLP is that it acts like a partnership but it IS publicly traded. I also acts like sort of a tax-deferred investment. The distributions that you receive every quarter and not taxed as capital gains, but your basis in the shares (like shares but called "units") are reduced. If you keep the units a long time (long after the basis is reduced to zero) you come out ahead on taxes. If you sell in the short term, your reduces basis may mean your total tax bill is quite a big chunk of the distributions.
 
JHW said:
some mistakes in the posts above

the whole point of an MLP is that it acts like a partnership but it IS publicly traded. I also acts like sort of a tax-deferred investment. The distributions that you receive every quarter and not taxed as capital gains, but your basis in the shares (like shares but called "units") are reduced. If you keep the units a long time (long after the basis is reduced to zero) you come out ahead on taxes. If you sell in the short term, your reduces basis may mean your total tax bill is quite a big chunk of the distributions.
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Okay we are talking about two different things. I was assuming that the OP was referring to closed investments (S corps or limited partnerships.) I see there is a type of partnership that is publicly traded. I do not have experience with those.
 
Sac Arrow said:
Okay we are talking about two different things. I was assuming that the OP was referring to closed investments (S corps or limited partnerships.) I see there is a type of partnership that is publicly traded. I do not have experience with those.
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a MLP (master limited partnership) is a specific thing, it was originally dreamed up as a way to make it easier to raise money for extremely capital intensive, long-paying enterprises. That's why you mostly see them owning things like pipelines, property with stands of timber, etc. One of the ways to qualify to be an MLP is for the partnership to derive most of it's income directly from natural resources.
 
I have no idea about the tax consequences of the investment.

I will say that from an oil company perspective, what gets sold to the MLPs are quite often non-operated interests which is typically a very weak position in terms of ownership. The non-op interest owner typically has no say and can exert very little influence on day-to-day operations which means the operator makes all spending decisions and the non-op gets to pay. Typically there is a voting system on major expenditures so the non-op gets some say in that spending.

Anyway, back to the day-to-day stuff. How a well or group of wells is operated has a huge influence on the value. If the operator makes a bad choice or simply neglects a property it's value can go to zilch really quick. There is no guarantee that a well will perform like someone in an office in Houston or Dallas or New York says.

Long story made short, if the MLP doesn't have an excellent track record with a very stable management team with oil industry experience, stay away.
 
Clark1961 said:
I have no idea about the tax consequences of the investment.

I will say that from an oil company perspective, what gets sold to the MLPs are quite often non-operated interests which is typically a very weak position in terms of ownership. The non-op interest owner typically has no say and can exert very little influence on day-to-day operations which means the operator makes all spending decisions and the non-op gets to pay. Typically there is a voting system on major expenditures so the non-op gets some say in that spending.

Anyway, back to the day-to-day stuff. How a well or group of wells is operated has a huge influence on the value. If the operator makes a bad choice or simply neglects a property it's value can go to zilch really quick. There is no guarantee that a well will perform like someone in an office in Houston or Dallas or New York says.

Long story made short, if the MLP doesn't have an excellent track record with a very stable management team with oil industry experience, stay away.
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you are talking about one very narrow incarnation, when an oil company created a separate MLP to own a well. That's but one of thousands of uses of a MLP. Many MLP's are stand-alone businesses that simply choose to organize as an MLP instead of as a corporation, for tax purposes.
 
JHW said:
you are talking about one very narrow incarnation, when an oil company created a separate MLP to own a well. That's but one of thousands of uses of a MLP. Many MLP's are stand-alone businesses that simply choose to organize as an MLP instead of as a corporation, for tax purposes.
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Thread title?
 
Clark1961 said:
Thread title?
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could be anything. ETP, EEP, etc certainly don't fit your description. I would (and do) own them before any oil majors. They make money all the time regardless of oil prices.
 
JHW said:
could be anything. ETP, EEP, etc certainly don't fit your description. I would (and do) own them before any oil majors. They make money all the time regardless of oil prices.
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The thread title refers to Oil MLPs so I'm assuming the OP is asking about Oil MLPs and not MLPs in general. i have done a little A&D work so know what somee of the drivers are. MLPs make the highest bids for some particular types of oil and gas properties. These MLPs are not formed by oil companies but by finance people.
 
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