Bogleheads

[Curtis Lowe]

Hello all,

I've decided to add a small slug of MLPs. I'm aware of all the tax considerations. I'm looking for your thoughts on the best two individual MLPs (not looking for a fund).

Thanks in advance.

Curtis Lowe

[Rob5TCP]

I have not decided, but here are several discussions on MLP - some are funds some are partnerships - one caveat - be extra CAREFUL about the tax consequences - you may have tax due in many different states

I hope some of this is useful to you. I would be curious, which you buy and why?

http://www.bogleheads.org/foru....hlight=mlp
http://www.bogleheads.org/foru....1192845067
http://news.morningstar.com/ar....?id=229150
http://www.bogleheads.org/foru....1211208665
http://www2.standardandpoors.c....tsheet.pdf
http://www2.standardandpoors.c....gy_Web.pdf
http://www.naptp.org/News/Week....PGuide.pdf
http://www.alerian.com/MLPprimer.pdf

[Opponent Process]

[inappropriate remark removed by Mod Mel]

[Curtis Lowe]

[inappropriate remarks removed by Mod Mel]

[mbrasher1]

Here is a board devoted to MLP investing: http://www.investorvillage.com....8&pt=m

They might have some suggestions. Also, a MLP is a type of structure that exists because it confers tax benefits on unitholders. But WHAT you are investing in also important. If you use the MLP structure to invest in E&P MLPs like Linn Energy (LINE) or Energy Partners Limited (EPL), it is not too different than investing in the corporations that are also in E&P -- like CHK, XTO or OXY. These kinds of stocks/MLPs are heavily dependent on the price of oil/nat gas.

A midstream MLP runs the pipelines and are not dependent on the price of oil/gas because they operate under long-term contracts to ship the stuff rather than owning it directly. These yields of these MLPs, which are yield-heavy, tend to correlate with Treasury rates, but also retain the possibility of equity appreciation.

I believe that investors looking at correlation of MLPs neglect to differentiate between these. Also, the Alerian index also includes E&P, IIRC.

Information on midstream MLPs can be found here: http://www.investorvillage.com....id=5123894

Kinder Morgan is a big name (KMP and KMR) but they seem to have quite high fees for the GP and also are NOT solely midstream MLPs. See also this guy's website: http://www.mcdep.com/ (tho he does not cover midstream MLPs)

To answer your request, TCLP and EPD are both large, active pipeline MLPs which you might consider.

[cato]

Check the MLP boards mentioned above. Though I would note that they tend to focus on factors like growth rates and DCF ratios, sometimes downplaying important size and business risk factors.

For stability, I would consider MLPs that focus on long-haul pipelines, like OKS and EEP.

I disagree somewhat with mbrasher1 about the E&P mlps. Most of these companies have hedged their production 80% or more out to 2012. So commodity prices don't affect them that much. Right now, EVEP and LINE are great buys and pay very high distributions.
_________________
Citigroup delenda est.

[alvinsch]

I've been investigating MLP's since earlier this year and have made a substantial investment in them due to the tax advantages, the big drop in share prices caused by forced deleveraging by hedge funds and financial firms, and the overhang of PIPES on many of the E&P MLPs.

There is so much to learn as the midstream MLP's alone encompass a lot of subcategories with different risks. One area that I weighted heavily because I was looking for a longterm investment but didn't require the highest yield, was the affect of IDR's (incentive distribution rights by general partners), and their associated drag on long term growth. Of the midstream MLPs there are only a few MLPs that don't ultimately end up paying the GP 50% of all dividend increases. This is a huge drag on cost of capital. I'm aware of only three midstream MLPs who have capped the GP cut to only 25% (EPD, NS, and TPP), and there are two MLPs in the gathering and processing category who have essentially no IDRs (CPNO and MWE).

FWIW, in the midstream area I endup with the following MLPs to give me the diversification I was seeking.

MIDSTREAM ishares: KMR and EEQ. These are the ishares equivalents of KMP and EEP except all distributions are automatically reinvested instead of being distributed so there are no K1's to deal with.

MIDSTREAM LPs: NS and PAA. NS is one of the few MLPs with a IDR capped at 25% and is run by the guy who created Valero energy. It's price is depressed because they have ventured beyond pipelines by buying a big asphalt business from CITIGO (Venezuela) and investors seem to be very uncomfortable with that. I bought PAA because I needed another large interstate pipeline MLP to complete my portfolio (I would suggest EPD as an alternative to PAA but I already decided to invest in EPD's GP instead: EPE).

MIDSTREAM GPs: EPE and MGG. These are the GP's of the midstream pipeline companies EPD and MMP. By buying the GP's instead of the LP's one is making a leveraged bet on the LP and gives up some yield with the expectation of more than double the dividend growth rate. I choice EPE because it actually is the GP of both EPD (55%) and TPP (23%), and owns a significant interest in the GP ETE (22%), which is the GP of ETP. So with one investment, and therefore K1, I get diversification across 3 MLPs.

G&P LPs: CPNO and MWE. These two are gathering and processing partnerships which are the only ones in the midstream area I'm aware of that have essentially eliminated IDRs so they believe they will be able to grow much faster than other MLPs and therefore the market has assigned a lower yield. G&P companies in theory have a higher risk than large interstate pipeline companies. (CPNO is actually a LLC while MWE is a MLP that essentially bought out the GP).

Because of the unwinding of leverage by hedge funds and others, in addition to the overhang of massives PIPES (private investment in public equity), E&P MLPs (exploration and production) had huge price drops this year that appeared to be caused by market dislocations. So I ended up with several E&P MLPs that I bought with yields in the 11-12% range. Throw in some expected growth for a while, (they reinvest part of their cash flow in new wells to replace declining production), and then the possibility of additional growth by acquisition, these MLP's seemed to good to be true in a era of possible declining market returns. I ended up with: LINE, BBEP, VNR and CEP. CEP is the only one with a IDR which is limited to 15%. Another reply suggested EVEP but I passed on it because is has a 25% IDR.

Bottom line is you have to decide what you are most interested in. If you don't want the MLP tax complexity then KMR/EEQ are good options. If you want well established MLPs that limit the GP's cut then EPD and NS I believe would be excellent choices. If you are willing to give up a little yield for the possibility of much greater total return, then GP's like EPE and MGG are great choices. If you are OK with the different risk characteristics of gathering and processing MLPs then CPNO and MWE are probably the best long term choices because of the lack of IDR's (though they are more expensive because of this). If you want some long term exposure to energy prices then the E&P MLPs might be of interest (as noted they hedge their production several years out to keep their distributions stable).

Finally, while I agree the investorvillage site is great for learning, I'd also strongly recommend signing up with the following yahoo user groups where people update the site with the latest MLP reports from the major brokerage firms. Don't know if the recommendations mean anything but the research is a great way to learn about the different companies and MLPs in general.

http://finance.groups.yahoo.co...._research/

Hope this helps.
- Al

[Curtis Lowe]

thanks for all the good MLP information guys!

[Bounca]

[inappropriate remarks removed by Mod Mel]

[Curtis Lowe]

[inappropriate remarks removed by Mod Mel]

[LFT_PFT]

Alvinsch:

The other day I was thinking I had not seen a post from you in quite a while. Glad to see your input. It seems you have spent a lot of time learning about MLP's. Great detailed post.

FWIW - appreciate your insights.

[Curtis Lowe]

For those who do invest in MLPs, what is the maximum allocation (as a % of your equity allocation) that you think is reasonable? I'm 35 years old with an income of about $235,000, and I have a high risk tolerance...It just seems like MLPs, with their low correlation and equity like returns, are underrated as an asset class and too good to pass up. Would a 10% allocation be nuts? I know that no one has a chrystal ball, but on a long term basis, does anyone think that the development of alternative energy sources is a threat to MLPs. Thanks in advance.

[Amishman]

[inappropriate remarks removed by Mod Mel]

[mbrasher1]

[inappropriate remarks removed by Mod Mel]

[alvinsch]

[SoonerSunDevil]

[G12]

[Curtis Lowe]

Alvinsch-
I appreciate your thoughtful responses to my posts about MLPs. Thanks for taking the time to share what you've learned. I too, am a fan of REITs, and they get a 10% allocation of my total portfolio. I've committed at least 5% to MLPs. Since I want 20% of my portfolio to be "hard assets" that have a low correlation to the S&P 500, I haven't decided if the other 5% will go to extra MLPs (for a total of 10% to MLPs) or to commodities I've seen the debates here and elsewhere and the utility of commodities. In any case, I don't think I'll be buying commodities anytime soon given the run up (I'm not a timer, but since I am in the beginning stages of building my portfolio, I can exercicse some caution on diving into what I believe are overpriced asset classes)..This additional 10% of hard assets (beyond the 10% REIT allocation), is considered my "Fun Money" and is the only part of my portfolio where I buy individual securities. Otherwise, I'm an index guy with a fairly conventional approach. ..One more question if you don't mind - would you be hesitant about plopping down 10% for MLPs now, given low interest rates?..I've already commited 5% (half to PPA and half to OKS)..Just wondering if now is just as good a time as any to buy the other 5%. I've seen conflicting views on MLPs' sensitivity to interest rates (kind of like REITs) For what it's worth, I've already got my REIT allocation to 10%. Again, thanks for your thoughtful replies.
Curtis

[alvinsch]

Curtis,

I started buying in March and have built up a 6% position in energy mlps (4% midstream, 2% E&P). I pretty much have my desired allocation at this point but I'm still willing to buy a bit more when one of my mlps hits a new low (i.e. bought more CPNO today). I believe in buying one's allocation over time as these mlp's can behave wildly at times (due to institutional ownership). Having said that, with so many of the mlps at 52 week lows after todays whacking, this seems like an opportune time to buy some more.

Like you I'm basically an indexer but in order to cost effectively take advantage of these mlps and reap their tax benefits, one needs to buy them directly. Since I'm mostly taxable, this is pretty much the only tax efficient exposure I can get to something close to commodities (I also hold one timber mlp, POPE). One thing I've learned from many of the experts on other web sites is that because most people buy these only for the yield, those with greater growth potential don't seem to be valued much differently than those without the growth potential (i.e. consider the GP's or no IDR mlps unless one needs maximum income).

Regarding when to buy them, it doesn't hurt to be a bit heretical to this forum when timing ones buys. If you follow them for a while you'll see these massive moves in individual mlp's for a day or a week while almost identical mlp's won't change at all. Then the next week the mlp will recover and another one will get taken out to the woodshed and shot. Since many of these were brought to market by the big investment houses like Lehman and much of the equity and debt was held by these institutions or other private investments (i.e. PIPES), they are like a bull in the china shop when they move. So it's no unusual to see mlps with 100k average volume trade many million shares in the last 5 minutes of trading or at the open. So I have to admit a few of my purchases were opportunistic.

As I noted earlier I'm happy with my current allocation and doubt I'll add any new mlp's but at the same time I have buy orders on almost all of the ones I currently hold at prices maybe 5% below where I last bought some. As long as the mlp's long term outlook hasn't changed materially, I'm more than happy to supply some additional liquidity for those institutions who need to bail for whatever reason. At the same time there can always be mlps which blow up with no warning so as I've said before: diversify, diversify, diversity.

It's interesting to follow the institutional holdings of these mlps because the big moves almost always turn out to be institutional dumping. There is currently a glut of mlps as they have such limited demand so many new mlps had to be cancelled as the mlps appear to be trading so far below NAV. With all the troubles with investment banks and hedge funds, they've been dumping indiscriminately. On the other hand, what's not to like about investments with average yields around 8.0% and average growth of another 7.5% (or 6.5-7.0% yields and 10-15% 5 year expected CAGR in some GP's and no IDR mlps). Also hard to pass up buying some of the E&P mlps with 12% yields hedged out 3-4 years, selling at significant discounts to NAV's (even assuming $80 oil and $7 nat gas), and with some expected single digit growth to boot.

Ideally, I'm about done buying and will let my 6% stake grow without touching it unless it grows to be above 10% of my portfolio at which point I'll sell some to get it back below 10%. Obviously one gets the most benefit from the tax deferral if one can let the mlps grow as long as possible so I'd rather not buy up to 10% and then have to start selling sooner.

Hope my long winded post helps (and makes sense .
- Al

[Random Musings]

Not that it offends me, but I find it odd that certain posts are removed due to "political content" or other rationale, while MILF can be allowed to slide by.

If this board wants to continue out and reach to all investors (male and female), perhaps a little more tact should be used. Many women today now handle finances/investments for the family (be in married or single parent). I think it would be foolish to lose potential "market share" on this board or a few more Laura's that could help out many people out there.

Regards,

RM

[schellhase]

[Mel Lindauer]

[Mel Lindauer]

The posts that I deleted have no place on this forum.That's the best way I know for you to lose your posting priviledges. Offending members will be hearing from us.

Regards,

Mel