How To Make Money Moving Oil
Over the weekend, I was discussing different investment strategies with a friend. We sat on the couch sipping coffee and debating the pros and cons of stocks, bonds, mutual funds, and ETFs. The discussion took an interesting turn… we started discussing an investment most people have never heard of – MLPs.
So, I know what you’re thinking… what’s an MLP?
MLP stands for Master Limited Partnership. It’s an investment vehicle that normally purchases energy related assets… like pipelines. The company runs the assets and distributes most of their profits back to shareholders. Here’s the cool part… most of the distributions are tax free or tax deferred (check with your tax advisor for all the details).
Some MLPs are private. Others trade on the stock exchange. That means anybody with a regular trading account can buy and sell an MLP. As you might have guessed, I found an MLP I really like…
But first, let me explain why I like MLPs in general.
Often the MLPs are in great (and simple) businesses. Some MLPs own oil and natural gas pipelines. Those are the ones I’m going to focus on today.
As you’ve heard me discuss before, we’re in the early innings of a long term commodity boom. Most MLPs will benefit from increasing demand for commodities. It makes their services all the more important. Here’s the great thing… MLPs can benefit from the commodity boom, but they’re able to sidestep direct exposure to commodity price volatility.
How can they do this?
They provide a service. In the case of pipelines, the service is shipping oil or gas from “Point A” to “Point B”. It’s a very low risk business. They take oil from one place and ship it to another… then collect a fee. That’s it. It’s that simple.
So, if MLPs are in such a boring business, why do I find them so exciting?
First, consider their customers. MLPs fill a very important need. The service they provide is vital… so demand isn’t going to disappear. Their customers always pay… because they don’t have other options. It’s too expensive and time consuming to build another pipeline. And once the pipeline’s in, it’s a near monopoly type business… and in some cases an actual monopoly.
Here’s another great thing.
The pipelines are hard assets… so no chance the business walks out the front door. No chance the business becomes obsolete. With some nominal upkeep, these pipelines should last for decades.
Hard assets are also good investments in inflationary times. As I’ve been saying for months, inflation is just around the corner. As inflation rears its ugly head, these assets are certain to become more valuable.
But, here’s the best part of the whole MLP story… the frosting on the cake, if you will.
MLPs pay their shareholders on a regular basis.
It’s just like a REIT or a dividend paying stock. Every quarter, MLPs pay their owners a distribution of the earnings. Sometimes these distributions can get quite large.
And some of them can be had tax free. Now, I’m not a tax advisor so be sure to talk with an expert first. But, I can tell you, if you’re in a high tax bracket, tax free income can really boost your returns.
So which MLP do I like the best?
There are a number of them out there. Most of them have great businesses. But one I recently researched really piqued my interest.
Energy Transfer Partners (ETP). They own and operate various pipelines throughout the American southwest including the states of Arizona, Colorado, Louisiana, New Mexico, and Utah. They own more than 17,500 miles of pipeline.
They also own a natural gas processing plant and three storage facilities in Texas. ETP also sells propane to more than one million retail customers.
At their last earnings report, the company announced impressive revenue and net income numbers. Their balance sheet is strong. And, their payout yield is over 8%.
Take a look at ETP and a few other MLPs. If you’re looking to add income to your portfolio, they might provide a great option.
Category: Commodities
