5 Energy MLPs Poised to Pop
Updated from 7 a.m. ET to include Permian Basin Trust recommendation
NEW YORK ( TheStreet) -- Investors seeking high income yields and insulation from macroeconomic volatility might want to consider energy master limited partnerships (MLPs).
Simply put, these investment vehicles are publicly-traded partnerships focusing on midstream energy infrastructure. They're structured to provide everything from state tax to financial flexibility, leaving the companies with abundant cash left over to reward its stakeholders with. Unlike many of the standard energy corporations, they don't pay corporate taxes, don't own risky exploration assets, and don't need to deploy capital for drilling operations.
Units of these investment vehicles are quoted daily on the major stock exchanges in stock market quotations.
"The heart of it is great infrastructure," says James Cunnane Jr., chief investment officer at Famco, a multi-product firm overseeing $6.4 billion.
The Interstate Natural Gas Association of America estimates that between 2011 and 2035 in North America, there's a need for about 1,400 miles a year of new, key natural gas transmission infrastructure; 16,500 miles a year of new, natural gas gathering and processing lines; 800 miles a year of new oil transmission pipelines, and much, much more.
Meanwhile, Dan Spears, a partner at Swank Capital, which specializes in MLPs and has $1.58 billion in assets under management, says MLPs have been a magnet for "people looking for income in an income-starved environment."
These entities have largely been insulated from volatile macroeconomic influences because households and businesses need to be able to access energy no matter what. There are still many underserved energy markets in North America, rendering a build out of energy infrastructure inevitable.
This is one factor that allows these energy infrastructure pure plays to generate steady, stable revenue. Furthermore, they're able to generate revenue based on the amount of volume that they transport, like a toll road, says Famco's Cunnane. While energy prices can swing wildly at the whim of macro trends, volumes generally don't vary to this degree.
Another revenue stabilizer is that the prices charged by long-haul pipeline operators are regulated by the Federal Energy Regulatory Commission.
That said, some investors are worried that the realization of President Barack Obama's latest tax proposals -- some of which is seen as unfriendly towards energy companies -- will hurt the MLPs' tax advantage.
"Will there be a fundamental reform in the tax code?" asks Cunnane. "If there were, that's where I think MLPs would be exposed to a change. When does it become more likely? Maybe in a scenario where the house, senate and presidency are all held by same party."
"They wouldn't be singled out in the change," he continued.
"I think the odds of MLPs being impacted by tax change are extremely minimal over the next year. But there are rising odds as you pass that period -- especially if we end up in a scenario where one party controls all. In a fundamental reform, I think there would be some concern."