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If all 42 gallons of a barrel of crude oil was somehow turned into gasoline, we'd simply modify the spot price of gasoline futures alongside oil prices. One term to know is “crack spread” - the difference between the price of crude oil and the products extracted from it. ( Source: Catalytic cracking units, Standard Oil of New Jersey’s Baytown, Texas, refinery in 1946) (Some MLPs also own processing and storage facilities, improving their margins but making them even more complex.) Or if the coronavirus or electric cars affects the refining sector, those transporting crude oil may not do so well. That’s why the chart’s midsection gives uses for each type of hydrocarbon, which gives us better insight into their profit opportunities.įor example, if agricultural product demand increases, MLPs with substantial exposure to natural gas could benefit disproportionately. Therefore, each MLP's type of commodity exposure must be evaluated independently. The spreads between the value of natural gas, natural gas liquids (NGLs), and various qualities of crude oil depend on each local or national commodity market. The "3.6 MMBOED" figure under natural gas, however, refers to a million barrels of oil equivalent per day. The top row lists the types of hydrocarbons EPD transports, measured mostly in millions of barrels per day (MMBPD). To better understand MLPs, consider the following slide from Enterprise Products Partners’ ( EPD) December 2020 investor deck. He never had an issue outside of dedicating an extra 30 minutes to them come tax time.īottom line: A sponsoring company designs and launches the investment vehicle, with the GP serving as the investment manager and the investors structured as limited partners. With that said, WER's lead portfolio manager has owned K-1 generating investments for most of his adult life. These reports can be perplexing and, when paying a CPA to interpret them, expensive. This means greater complexity but potentially greater tax benefits.Īs for the complexity part, all MLPs generate what many investors would describe as the “dreaded” Form K-1. So what does that mean for investors? A lot, actually.Īs LPs, investors are taxed more like business owners than traditional shareholders. The management arm is legally defined as the general partner (GP) while investors are limited partners (LP).
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But their partnership structure means their "shares" are actually "limited partner units," or units. They do have to derive at least 90% of their income from certain industries like natural gas infrastructure. All other things equal, this means greater cash flows available for investors. Like its two cousins, REITs and BDCs, MLPs are pass-through vehicles that don’t pay corporate tax. If you’ve ever wondered about master limited partnerships, or MLPs, this is the place to be. With that goal in mind, here’s the final piece of the tax-advantaged company puzzle we want to address. But these articles can save you a couple years of tuition at the school of hard knocks. It requires hundreds, maybe thousands, of hours of time well spent to become a skilled investor, of course. Teach a man to fish, and you feed him for a lifetime.” “Give a man a fish, and you feed him for a day. We also covered regular REITs and business development companies (BDCs) to give you the best opportunity to make steady profits. “For the investor (who) doesn’t mind performing a little extra due diligence and has the patience to strategically acquire shares at favorable valuations, the misunderstood mREIT sector can provide fully covered and nearly double-digit yields.” “In short, mREITs are perhaps best viewed as trading vehicles whose business strategies, balance sheets, and ties to interest rates must be constantly and carefully monitored.” WER did a similarly phenomenal job on mortgage real estate investment trusts (mREITs), giving the ins, outs, ups, and downs involved in owning them: And the following information proves it to be a very good move. One of the reasons iREIT on Alpha brought WER onboard is to provide unmatched expertise on other income-oriented investments. This article was coproduced with Williams Equity Research (WER).