MLPs - Another Investment Medium in Energy to Reduce Extreme Volatility and Yield a Return

With such dramatic swings in the price of oil, one thing does remain constant; the world is still using it and will for the foreseeable future. So how can one begin to minimize the volatility yet still be exposed, in some capacity, to oil and yield a return?

Crude oil sky rocketed to US$145 in July 2008 then dropped to just above US$30 a barrel in December 2008. In 2009 it had traded between US$35 and US$82 a barrel. I can say that I am not that savvy of an investor to fully capitalize on these wild swings, nor have the stomach for such dramatic changes. Oil, and energy for that matter, is priced based on speculation and the macro environment, possibly more so than all other commodities. Gold may also fall into this category, but gold investments basically fall into owning mining equities, ETFs or having physical ownership. One may invest in tertiary aspects, like mining equipment companies, but little else. However, oil and other fossil fuels have complimentary fields, like pipelines. With this addition the investment possibilities increase.

With such dramatic swings in the price of oil, one thing does remain constant; the world is still using it and will for the foreseeable future. So how can one begin to minimize the volatility yet still be exposed, in some capacity, to oil and yield a return?

Master Limited Partnerships (MLPs) could be an answer. An MLP is a limited partnership that is publicly traded on a securities exchange. It technically issues units rather than shares. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. They are similar to real estate investment trusts (REITs) in the tax liability, but structured differently. REITs are incorporated, while an MLP is a partnership. So unit holders pay income tax on the income from an MLP, but they also get a proportionate share of the MLP's tax deductions and credits. Associated deductions for depreciation and other costs typically minimize taxes.

While this may seem daunting, MLPs pay their investors through quarterly required distributions (QRD).�This is directly proportional to the amount of the company owned.� The divided yield typically ranges from 4% to 7%. What is more, often in the creation of the company, dividends are often required, failure to do so may be deemed an event of default and detrimental to the company. In the energy space, most company will lock long-term contracts and often have the fees federally regulated, guaranteeing known income for an extended period of time.

As I have often written about over-productization, in May of 2010, the first ever MLP mutual fund was launched, with a stated goal of providing "a high level of inflation-protected income.” The fund is a part of the SteelPath Mutual Fund Family. While it is yet another product, I am not necessarily against it, it just serves as yet another investment medium.

There are many MLPs to purchase and this article is not meant to specify which to invest, but for the investor to understand how one may get further exposure to natural resources. For a comprehensive list, one may view the Dividend Detective website, but like all investments it is up to the purchaser to do due diligence and forever remember: caveat emptor.

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