“A Master Limited Partnership (MLP) is a publicly traded limited partnership whose units trade on a stock exchange and whose income passes directly to investors without corporate taxation, provided it derives the majority of its revenue from qualifying natural-resource activities.” Source: ChatGPT
Investors don’t buy shares in MLPs, they are called partnership units.
Master Limited Partnerships became possible in 1986. The basic meaning of MLPs are that all investors can help in funding energy infrastructure, without the government. MLPs don’t pay taxes, unless the rules stated below are violated.
At least 90% of income must come from qualifying activities, including:
- Transportation of oil or gas;
- Processing hydrocarbons;
- Storage;
- Natural resource extraction;
- Certain mineral activities;
Master Limited Partnerships have two types of partners:
- General Partners (GPs), who manage the partnership and control operations;
- Limited Partners (LPs), these are public investors that provide capital and receive distributions;
In MLPs, shareholders are called unit holders and dividends are called distributions.
Nearly all modern Master Limited Partnership operate in the logistical infrastructure of the energy sector. Examples are pipelines, storage terminals and natural gas processing plants.
By investing in a MLP, you are not investing in oil companies, but in their logistical infrastructure that earns fees.
They often pay quarterly cash distributions to their investors. MLPs pay no corporate income tax, investors are taxed individually.
Master Limited Partnerships can grow by:
- Building new pipelines, processing plants and export facilities;
- Buying existing assets from energy producers;
- Energy companies can sell assets to MLPs for them to manage;
Just like bonds, interest rates can have a big impact on MLPs. When interest rates rise, MLP prices often fall.
As in any other investment class, there are some risks in MLPs.
The throughput in pipelines for example can be lower as usual, which results in lower earned fees. They also often need government approval for building pipelines, and there could be environmental issues. Energy companies could also go bankrupt.
Master Limited Partnerships could be a part of your investment portfolio for their high cash yields and diversification in energy infrastructure.
Finally, MLPs can be complex investments because of how they are taxed.
We highly recommend you to study more about Master Limiting Partnerships before investing in them!