Master Limited Partnerships have been under pressure of late, in part because of oil. The major concern for this sector is not as much oil and energy prices, but Washington D.C. policymakers and the tax structure. Much of the payouts look, act, and feel like traditional dividends, but these monthly or quarterly payments generally represent pass-through capital rather than traditional dividend income. In short, much of the payouts are tax-free. The Alerian MLP Index had sold off more than 6% this week versus a drop of about 2.1% in the S&P 500 Index.
In the actual MLPs, we are focusing on the larger entities with longer track records: Enterprise Products Partners LP (NYSE: EPD), Kinder Morgan Energy Partners LP (NYSE: KMP), Magellan Midstream Partners LP (NYSE: MMP), and Plains All American Pipeline LP (NYSE: PAA). In the closed-end funds, we look at the Kayne Anderson MLP Investment Company (NYSE: KYN) and The Cushing MLP Total Return Fund (NYSE: SRV).
In the world of ETFs, or ETNs, we will review the following: JPMorgan Alerian MLP Index ETN (NYSE: AMJ), ALPS Alerian MLP ETF (NYSE: AMLP), Credit Suisse Cushing 30 MLP Index ETN (NYSE: MLPN), and the Morgan Stanley Cushing MLP High Income ETN (NYSE: MLPY). Then there is the leveraged move in an ETN via UBS E-TRACS 2x Long Alerian MLP Infrastructure ETN (NYSE: MLPL), which trades as 200% of the underlying move.
News out of the National Association of Publicly Traded Partnerships that the Ways and Means Chairman Dave Camp (R-MI) would not be inclined to consider taxing pass-throughs is helping to bolster the MLP sector. The concerns stemmed from reports of a Treasury proposal to tax pass-through entities with income over a certain amount. The NAPTP has said this is a non-starter in the House of Representatives.
There may still be some concerns, or at least some challenge. Finance Committee Chairman Max Baucus (D-MT) has apparently been quoted as saying that maybe pass-throughs need to be looked at and possibly be treated as corporations if income is over certain hurdles. The counter to this concern is that the NAPTP said in direct conversation between Baucus and representatives that he was not concerned about pipeline PTPs. The NAPTP belives that Camp’s statement kills the taxation issue.
A separate research note from Bank of America Merrill Lynch maintains the viewpoint that “a change in Energy MLP tax status is unlikely and we consider this week’s sell-off as overdone.” BofA also believes that much of the weakness is more tied into the sudden drop in commodity prices as seen with Thursday’s massive drop in oil prices.
The wild card issue we have today is that it is not known which, if any, nor when, pass-through entities will appear in future Treasury tax reform studies. We do believe that there is also a correlation to commodity prices as far as an “energy bias” is concerned but the reality is that most of these operations are not dependent upon oil and gas prices except when it comes to extremes that change business models and ultimately which change oil and gas demand.