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Before you invest in master limited partnerships, read about this risk (Part 2)

2013.07.07 - Lost MLP Tax RevenueEnlarge GraphContinued from Part 1

Better midstream infrastructure benefits energy companies across many sectors

Many entities that are well-versed in the problem facing master limited partnerships—including parties such as energy companies, research analysts, and politicians—feel that it’s unlikely that the U.S. government will revoke MLPs’ special tax status in the near future. One of the reasons for this doubt is that this special structure encourages more investment into oil and gas infrastructure sector, as the majority of MLPs are midstream energy companies. Better energy infrastructure, such as new pipelines, is positive for upstream and downstream companies as well, because it results in generally more efficient and more available hydrocarbon transportation. This need for energy infrastructure has only grown in recent years with the U.S. shale boom, resulting in the rapidly growing production of oil and gas that companies need to transport to end markets.

It’s all about job creation

Given the wobbly economic climate since the 2008 recession and unemployment rates still topping 7%, politicians are unlikely to enact any legislation that negatively affects jobs. If adverse tax legislation is enacted and MLPs are consequentially required to scale down or liquidate, potentially leaving some voters unemployed, politicians who voted to enact the tax reform would have to answer for their decision.

Conclusion

Though the likelihood of a major change in the tax treatment of master limited partnerships is probably small due to various reasons (including the need for energy infrastructure investment, the pressure on politicians to stem unemployment, and the relatively inconsequential federal tax revenue loss), investors should still be aware of this potential risk. MLPs could change, and the change could come as a surprise, like what we’ve seen happened in Canada not too long ago. The revocation of MLPs’ federal tax-exempt status would be a significantly negative catalyst for the sector, and could negatively affect upstream and downstream companies as well—though they’re generally not structured as MLPs—as midstream infrastructure investment would likely decrease. This decrease of midstream infrastructure could make certain projects less profitable or possibly unfeasible, and likely make transportation options more expensive or harder to obtain. This change would affect all MLPs, including large caps such as Kinder Morgan Energy Partners (KMP) and Enterprise Products Partners (EPD), as well as mid caps, including Targa Resources Partners (NGLS) and MarkWest Energy Partners (MWE). Additionally, MLP exchange-traded funds such as the Alerian MLP Index (AMLP) and the Yorkville High Income MLP ETF (YMLP) would be affected.

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