The acronym MLP has been all over my radar recently. It first surfaced with two of my co-workers who are self-described “bronies,” or fans of the latest “My Little Pony” show, “Friendship is Magic,” and who fall outside the target demographic of little girls. (Confused? Watch this.)
It showed up again this week as the Master Limited Partnership, which belongs to a very different context—the financial industry that’s propping up the domestic energy revolution.
What’s a Master Limited Partnership?
An MLP is basically a publicly-traded company that doesn’t pay federal corporate taxes. By law, it must get more than 90% of its income from natural resource development, extraction and transportation.
OK. So who uses MLPs?
Increasingly, energy companies are spinning off parts of their business—usually the energy transportation parts— into MLPs to save on taxes. Hess, a big oil company, just announced this week that it’s putting lots of its transportation-related assets in North Dakota (like a crude oil pipeline terminal and natural gas processing plant) into an MLP.
Why do companies like MLPs?
For one, they don’t have to pay the 35% U.S. corporate tax rate anymore. Secondly, for some reason, things like pipelines and gas plants are worth more as part of an MLP than as part of a regular-old corporation, and investors are willing to pay more for them. That means a company can raise lots of money by simply shifting assets from being part of a corporation to being part of an MLP.
That’s crazy. How does that work?
“It’s a great mystery to me,” says Kevin Kaiser, managing director of the energy sector at Hedgeye Risk Management. Kaiser, for one, thinks many MLPs are overvalued—as in, shareholders (which are called “unitholders” when we’re talking about MLPs) are paying way more for them than they are worth. Other investment managers are also skeptical about whether MLPs are actually a good investment. But as long as unitholders and companies are making money, these MLPs are likely to become more popular. According to MarketWatch,
…last year, there was a record-breaking 21 initial public offerings of MLPs, and according to Morningstar, nearly $12 billion flowed into funds investing in MLPs — an all-time high.
Why should I care if an oil company is a “company” or an MLP?
The popularity of MLPs speaks to how cash-intensive the modern energy economy is. Sure, oil companies make the big bucks selling all that oil, but it takes a lot of money to make money. MLPs are a tricky way for oil companies to raise cash without really doing anything. Kaiser says he’s not too worried, yet, about the preponderance of MLPs. But if more companies do this, he worries the everyday people who are invested in them could get lose their shirts.