Steady Returns in MLPs

Submitted By Prudent Speculations

There was a negative Reuters story out on the MLPs over the weekend that has and will likely continue to pressure the sector for sometime given its relative small size and market position. The article uses the example of SemGroup to weave a story that attempts to depict MLPs as risky investments where the potential returns do not compensate investors for the risks that they are taking. A key point in the article was that the structure of the limited partnerships limits the unit holders ability to bring about change in the corporate governance of the company. While this is of course true, it is largely irrelevant, after all how many minority shareholders are capable of bringing about change at your standard publicly traded corporation? The SemgGroup situation is in my opinion clearly an isolated incident and while improved corporate governance may have helped, it would not have prevented the implosion of the parent company.

Had SemGroup followed the typical business path of your standard general partner, its publicly traded subsidiary SemGroup Energy Partners (SGLP), would not be in the trouble that it is in. The energy trading losses that occurred at the company's parent company should not be viewed as being indicative of the natural risks in the standard MLP business. Instead, I believe that SemGroup's blowup should be viewed in the same light as managerial fraud.

The generally bearish Reuters article also sighted the complex tax procedures for ownership as well as the fact that the general partner of the typical limited partnership receives an increasingly large share of the limited partner's earnings after a certain points as additional reasons as to why one should not own MLPs. While these are all valid points, they do not change my opinion that MLPs, that if owned in a large variety and in a diversified portfolio can represent a great alternative to fixed income investments. The securities offer above market dividend, with yields approaching 10% in some cases, representing a smart way to boost a portfolio's yield. In addition, the ownership of these units give's the holder the equivalent of a call option on domestic pipeline volume growth, rising oil and natural gas production and exploration as well as exposure to a general increase in the price of oil and natural gas. It is this "call option" that gives these fixed income like investments the extra kicker that they need to be truly successful over the long-term.

Below I have highlighted 10 of the best returning MLPs, their returns exclude the dividends that have been paid out on the units. It should be noted that their returns are significantly higher then their more recently established peers. I would imagine that this is the case because of the fact that the younger peers have not managed to participate in some of the industry's more intense growth phases; however, the surge in new shale plays across the U.S. will provide ample opportunities for the new MLPs to replicate the returns of their more established peers.