A Master Limited Partnership, or MLP, is a publicly traded business organization with one general partner who is in charge of business and other limited partners who just purchase shares and receive dividends. MLPs do not pay income tax if their earnings are related to real estate, commodities, or natural resources, including energy. Energy resources can include oil, natural gas, coal, timber, and ethanol and bio-diesel fuels. MLPs are most often found in the gas and oil industry, where they provide support services like transportation, refinery services, supplies, and logistics for oil companies.
What Do MLPs Do?
MLPs in the oil and gas industry can be classified as upstream, midstream, and downstream. Upstream organizations are primarily involved in exploration and development of new energy resources. Midstream MLPs most often own and/or operate pipelines that transport crude oil and natural gas from the well to the refinery or storage facility. The income from an oil pipeline tends to be stable as the fees charged depend on the amount of product running through the pipeline rather than the cost of the product itself. Gas pipeline contracts, on the other hand, are more often connected to the price of gas on the market. Midstream MLPs also operate storage facilities and refineries. Downstream MLPs are involved in distributing the refined oil or gas to the end residential or commercial customers.
Why Are MLPs Attractive Investments?
Investors are drawn to MLPs for the tax benefits. As a pass-through entity, the MLP itself does not owe taxes to the IRS; rather, its individual owners are taxed on the income or losses. However, anywhere from 80% to 90% of that income is considered tax-deferred, meaning that a limited partner is not taxed on the income until that individual sells his or her units. By that time, the cost basis may have dropped enough that the tax obligation is minimal. In addition, MLPs are solid investments because they are generally not tied to the price of oil or gas on the market. Because they deal in services rather than the commodities themselves, they get paid the same no matter what the commodity is selling for.
Investing in MLPs can be a good way to make a secure investment in the energy industry. For specific investment advice, view this page.