Saturday, November 03, 2012

Hot Oil MLPs with High Incomes

Investors looking for high incomes often turn to MLPs or Master Limited Partnerships, and generally are companies in energy, primarily oil and gas exploration and production. According to, there are over a dozen Oil and Gas Exploration and Production MLPs, with yields ranging from 3.1% to 9.9%.

MLPs are investments that are similar to income royalty trusts, except that they are structured as limited partnerships. MLP's differ from high income stocks in several ways. Since they pass through income without being taxed at the corporate level, they avoid double taxation. In addition, tax deductions can be passed through to the holders of MLPs, providing sheltering of the MLP dividends.

But there are differences when you compare them to income royalty trusts. MLPs shouldn’t be put into a retirement plan because of the UBTI or Unrelated Business Taxable Income problem, which could jeopardize the tax deferred status of retirement plans. The UBTI issue is way beyond the scope of this article so you should certainly talk to your accountant about any and all tax consequences of MLPs. Also, MLPs don't send out 1099 forms, they send out a Schedule K-1 Form, and the income is reported differently on tax returns. This may mean extra hours and aggravation when you or your accountant prepare your taxes.

One example is Mid-Con Energy Partners, LP (MCEP), which pays a yield of 8.8%. The dividend is paid quarterly. This Dallas, Texas based company explores, develops, and produces oil and natural gas on properties in southern Oklahoma, northeastern Oklahoma, and parts of Colorado. The MLP trades at 11.9 times trailing earnings and 10.5 times forward earnings.

Pioneer Southwest Energy Partners L.P. (PSE), based in Irving, Texas, yields 8.2%. The company has a price to earnings ratio of 11.5 and forward PE of 10. Pioneer operates in the Spraberry field in the Permian Basin area of west Texas.

One high yield company that is actually structure as an LLC instead of a MLP is Linn Energy, LLC (LINE), which operates in the Mid-Continent, the Permian Basin, Michigan, California, and the Williston Basin. Linn pays a dividend rate of 6.8%. It has a forward PE of 24.9. It was the first publicly traded independent oil and natural gas limited liability company in January 2006.

In spite of the fact that Linn is an LLC, it is classified as a partnership for tax purposes, so a unitholder is considered a partner and receives a Schedule K-1. In regards to the taxation of the income, the company website says "In general, cash distributions received from LINN Energy are not taxable. You are typically only required to report in your tax return items of income, gain, loss, deduction or tax credit reflected on your Schedule K-1. However, if the cumulative cash distributions received from LINN Energy exceed your tax basis in the Company, you could be taxed on the amount exceeding your tax basis."

For a free list of all of the oil and gas exploration and production master limited partnerships including three that pay more than 9%, go to The list can be downloaded, updated, and sorted.

Disclosure: Author did not own any of the above at the time the article was written.


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