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"Upstream" Master Limited
Partnerships -- A New Security for
Income Investors |
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Published:
September 24, 2007
Imagine if you had piled into
Canadian income trusts four years
ago -- back when oil prices were
still around $25 a barrel. Today,
crude sits at over $80 per barrel,
and the shares of many oil-related
trusts have skyrocketed.
Well, it may be too late to ride
many of these stocks to the top, but
it's not too late for another group
of energy-related securities that
are bursting out of the starting
gate: "upstream" master limited
partnerships (MLPs). These new
securities have caught the eye of
many investors, mainly due to their
astounding average annualized
returns of +121% (including
dividends) since they came onto the
market several months ago.
The typical MLP owns so-called
"downstream" oil and gas assets,
such as pipelines and processing
facilities. Pipeline operators
Magellan Midstream Partners (NYSE:
MMP) and NuStar Energy (NYSE: NS)
are examples of downstream MLPs.
But "upstream" assets like oil- and
gas-producing properties have
historically been stowed away into
income trusts. That's because
companies that had their upstream
assets in MLPs during the early
1980s, when oil prices plunged,
couldn't make their distributions.
The income trust thus came to
replace MLPs as a more secure
investment vehicle for volatile
upstream producing assets.
But there's a problem with income
trusts. Unlike MLPs, U.S. energy
trusts aren't legally allowed to
expand their original asset bases.
So once a producer's reserves are
used up, the trust folds.
Now things have come full circle.
Oil prices are at record levels and
yield-hungry investors are willing
to bet on a volatile sector in
return for high potential rewards.
To respond to this new environment,
oil companies are folding their
producing oil and gas properties
into "upstream" MLPs. This lets them
make generous distributions to
investors, and they are legally
allowed to keep growing through
acquisitions.
And the tax-advantaged status of
master limited partnerships also
makes them a darling of income
investors.
You see, MLPs allow for pass-through
income, meaning that they are not
subject to corporate income taxes.
Instead, owners pay individual
income taxes on their portion of the
MLP's income. And since MLPs are not
subject to income tax, it means that
more cash is available for
distributions to investors.
But best of all, large institutional
investors are piling in, driving up
shares prices, and the MLPs are
leveraging their higher share prices
to purchase more assets. That, in
turn, generates more cash flow --
which translates to higher dividend
payouts -- which leads to a higher
share price -- which allows the firm
to raise more money to make more
acquisitions -- and repeat the
cycle.
Take Constellation Energy Partners
(NYSE: CEP), a limited partnership
spun off by electric utility
Constellation Energy Group (NYSE:
CEG). The partnership helped fund a
$115 million acquisition by raising
$60 million in a share offering. The
purchase gave an immediate boost to
the bottom line, which in turn
triggered a +219% hike to the
quarterly dividend. CEP shares
responded by climbing +3% the day
after the dividend announcement,
paving the way for further
acquisitions down the road.
Upstream MLPs have certainly been
kind to investors, but will the good
times keep rolling? For now, the
future of the upstream MLPs listed
in a recent issue of
StreetAuthority's premium
High-Yield Investing
newsletter looks promising. In that
issue, editor Carla Pasternak
provides a comprehensive list of all upstream MLPs available to
investors; each one has posted
annualized returns of at least +80%
and carries a stable and growing
dividend yield. So if you want to
learn more about upstream MLPs, the
names and ticker symbols of the
leading players, and
StreetAuthority's High-Yield Investing
newsletter,
follow this link. |
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