Energy prices are on the rise, and master limited partnerships (MLPs) are catching the attention of legendary investor Bill Gross. In a recent social media post, Gross expressed his love for MLP pipelines, comparing them favorably to artificial intelligence. MLPs have seen significant growth in the past 12 months, with some climbing by double digits. This surge is largely supported by the increase in energy prices, including a nearly 20% jump in West Texas Intermediate crude futures and a 16% surge in Brent futures amid escalating conflicts in the Middle East and production cuts by OPEC+.
MLPs offer investors an opportunity to capitalize on the exploration, transport, and processing of oil and gas while providing attractive dividend yields. Companies like Plains All American Pipeline and NuStar Energy, highlighted by Gross, boast dividend yields of 6.8% and 7.1%, respectively. While oil remains a hot commodity, some experts suggest that the natural gas sector could offer promising growth prospects for pipeline investments. Despite a 26% drop in natural gas futures in 2024, investments in this space could be lucrative, especially with the increasing demand for natural gas liquid exports in Asia.
Stephen Ellis, an energy and utilities strategist at Morningstar, recommends focusing on natural gas over oil for midstream investments due to the sector’s attractive outlook. Companies like Energy Transfer, Enterprise Products Partners, and Targa Resources stand out as promising choices in the natural gas space. Energy Transfer and Enterprise Products Partners offer yields of 8% and 7.1%, respectively, while Targa, a C corporation, provides a yield of 1.8%. Analysts are bullish on these companies, with consensus price targets suggesting significant upside potential from current levels.
One key advantage of MLPs is their unique structure, which allows them to offer high yields to investors. Unlike C corporations, MLPs are designed as limited partnerships, where general partners manage the day-to-day operations and limited partners provide capital and receive income distributions. This structure enables MLPs to avoid corporate income taxes, resulting in attractive yields for investors. However, investing in MLPs comes with its own set of challenges, particularly in terms of tax complexity.
While MLPs offer enticing income opportunities, investors must navigate the complexities of tax reporting, as partnerships issue Schedule K-1 forms detailing income distributions. This can lead to delays in filing individual tax returns, potentially requiring extensions until October 15. Additionally, investors need to carefully consider the tax implications of holding MLPs in different types of accounts. Holding MLPs in tax-deferred accounts like IRAs could trigger tax liabilities, such as unrelated business taxable income, necessitating separate tax reporting for the account.
Investing in MLP pipelines can be a lucrative venture for income-oriented investors seeking high yields in the energy sector. However, it is essential to understand the unique structure of MLPs, the potential tax implications, and the risks associated with investing in this sector. By carefully evaluating these factors and staying informed about market trends, investors can make informed decisions to capitalize on the opportunities presented by MLP investments.