Quote: (02-14-2014 07:30 AM)villageindian Wrote:
Quote: (02-14-2014 07:21 AM)Ardbeg Wrote:
For those of us who don't want to trek it out to ND, why haven't people mentioned investing in master limited partnerships (MLPs) as a way to cash in on the U.S. oil boom. Many have high yields (4 to 6%), stable cash flows (the pipelines are like toll roads, and these companies only build once then have secured customers), regulatory protection (you can't just build a pipeline, the government has to approve it), and tax advantages. I'm up like 17% in the past 5.5 months on my MLP investments.
There is a fundamental difference between what you're saying and what's happening. The MLPs now are mostly in pipelines though there are other infrastructural elements eligible for a MLP. Also, the interest rates are currently low hence MLPs look advantageous but when the Fed hikes the rates, it wont be attractive anymore.
For ND, there are very few pipelines coming out of there. Most of the crude is shipped by rail through BNSF (Warren Buffett's company). What I would suggest is to play the crude by rail stocks of the Class 1 rail companies - Norfolk Southern, Kansas State Union, Union Pacific etc.. These are doing really well and I think they are going to have another stellar 2014 unless there are more rail accidents (4 so far in 2014 alone).
The rise in interest rates are the biggest uncertainty in the MLP space. But the entire market will suffer with spike in interest rates (though MLPs more than others because of their constant need for financing).
If you are able to take that risk, there are many advantages with MLPs, specifically if you want to benefit from the oil boom in the U.S. The problem with lots of exploration companies (e.x. EOG) is that they are very sensitive to commodity prices, and if the price of oil tanks, so too will these stocks. I'm bearish on oil prices in the near to medium term: not only do you have a slowdown in demand from emerging markets, you have an uptick in supply in the U.S., Canada, and even Iran and Iraq.
MLPs (specifically pipeline MLPs), on the other hand, have little sensitivity to commodity prices. The make money on volume, not commodity price. Many have take-or-pay contracts, which means their customers have to pay fees regardless of whether they use the pipelines to transport oil/gas.
The problem with railroads are (1) they are not pure plays on the U.S. boom. Railroads haul many other things besides energy products (2) they are also more correlated with the stock market than MLPs (3) don't have the tax-deferral benefits of MLPs (with MLPs, you get a K-1 instead of a 1099, which can be a pain in the butt when you file. But if you use a normal tax prep software, it shouldn't be that bad. The tax headaches only kick in when your distributions are so high that you have to file taxes in states you don't live in. But that's going to happen only if you're investing +$400,000 in a specific MLP).
