master limited partnerships

Long time readers of this blog know that we have previously reported that brokerage firms have increasingly recommended that retail investors invest heavily in various types of oil & gas investments including private placements, master limited partnerships (MLPs), leveraged ETFs, mutual funds, and even individual stocks. See Overconcentrated in Oil and Gas Investments?, MLP Fund MainStay Cushing Royalty Energy Hurt by Failing Oil & Gas Prices; Oil and Gas Investments – Issuers Profit While Investors Take All the Risk

For instance, MLPs are publicly traded partnerships where about 86% of approximately 130 MLP securities, a $490 billion sector, can be attributed to energy and natural resource companies. Billions more have been raised in the private placement market. These oil and gas private placements suffer from enormous risks that often outweigh any potential benefits including securities fraud, conflicts of interests, high transaction / sales costs, and investment risk.

These investments have been recommended by brokers under the assumption that oil & gas would continue to be sold at around $100 and increase steadily over time. However, last summer the price of oil & gas plummeted due to a strengthening dollar and increased global supply of oil and remains below $60 to this day. Some experts are saying that if production volume continues to be as high as it currently is and demand growth weak that the return to $100 a barrel is years away.

The attorneys at Gana Weinstein LLP have been following the collapse of the MainStay Cushing Royalty Energy Income Fund (CURAX), (CURNX), (CURCX), and (CURZX). The fund describes its investment strategy as investing primarily in securities of energy-related U.S. royalty trusts, Canadian royalty trusts, and Canadian exploration and production (E&P), E&P master limited partnerships (MLPs), and securities of other companies in the same businesses as Energy Trusts and MLPs engage.

Investments in MLPs contain significant risks and the Cushing Fund has declined by over 50% in value from its high. These risks stem from the fact that MLPs tend to fluctuate with the price of oil and gas. For example in 2008, when oil plummeted in the wake of the great recession the AMZ MLP Index declined by 36.9% in a single year. MLPs have other risks that investors should know including the fact that these investments often grow their distributions at an accelerated rate in their first two years in order to attract positive research reports from Wall Street analysts. The funds use the increased distributions and positive reports to influence their values higher even though the true long term yield of these MLPs are unknown.

As a background MLPs are publicly traded partnerships. About 86% of MLP securities are related to energy and natural resource companies. There are about 130 MLPs trading on major exchanges that focus on energy related industries and natural resources. While MLPs have the same liquid trading characteristics as common stocks they are internally very different. For instance, MLP’s are pass through investment vehicles that pass through their income to the investor without any company level taxation. In addition, MLP’s must derive 90% of their revenues from their businesses in natural resources activities. Investors should also be aware that in practice, most MLP’s pay out most of their earnings through distributions rather than reinvest profits in the company. This causes the MLPs to issue additional debt and shares in order to grow the business.

Articles Tagged with master limited partnerships

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MLP Fund MainStay Cushing Royalty Energy Hurt by Failing Oil & Gas Prices