Master Limited Partnership (MLP) Investment Losses – updated 3/11/20
In the last few years, the securities attorneys at The White Law Group have grown concerned over the potential for investors to suffer losses arising from their purchase of Master Limited Partnership (MLP) investments at the recommendation of their brokerage firm or financial advisor. This article will explain the basics of MLPs and where we believe there are potential risks for the investing public.
In the United States, Master Limited Partnership (MLP) investments are limited partnerships that are publicly traded on an exchange, much like shares in a corporation, qualifying under Section 7704 of the Internal Revenue Code.
How are MLPs Structured?
For a business to qualify as an MLP, the IRS requires that at least 90% of its revenue come from the natural resources industry or real estate. In theory, MLP investments combine the tax benefits of a limited partnership with the liquidity of a publicly traded security, such as stock in a corporation.
Investors in MLPs are considered limited partners, while the general partner in the MLP owns a small share of the entity, usually 2%, and manages the MLP. Unlike a corporation, an MLP does not pay income taxes on its profits at the business entity level. Taxes are only paid on money received by the MLP when it is distributed out to the partners, who report that income on their personal tax returns.
Why buy a Master Limited Parternship?
Combined with the limited liability protection afforded to limited partnerships, this can make it attractive for a business venture to structure itself as an MLP – it can raise capital from investors and offer them the liquidity of publicly traded investments while avoiding the tax consequences that a business formed as a corporation might incur.
From the investor’s perspective, MLPs may be offered as a tax-advantaged investment opportunity. Unlike dividends paid by stocks or interest payments from bonds, investors in MLPs have the opportunity to claim the depreciation of the MLP on their tax returns, which can reduce the potential tax liability they would otherwise have for the income they received from the MLP.
However, with recent changes to the tax code at the beginning of 2018, the advantage of being an MLP isn’t nearly as great as it once was.
What Are the Risks to the Investor?
A Master Limited Partnership is a complex investment vehicle that may be difficult for the average retail investor to understand. The limited liability protection afforded to the MLP, the requirements of complying with the Internal Revenue Code and the specific contractual terms set for the in the partnership agreements that govern the operation of the MLP can make it difficult for investors to understand how their investment will operate or what the risks involved in the investments are. Below is a brief list of just some of the risks that investors in MLPs may be taking by investing.
- An MLP’s partnership agreement, which is essentially the contract that governs the operation of the MLP, will detail the MLP’s requirements relating to distribution cash on a quarterly basis. Because MLP’s trade as a multiple of cash flow, MLP’s are incentivized to distribute most, if not all, of its “available cash” to the investors. However, because MLPs pay out most of their income to the investors, the business may be dependent on borrowing or raising capital by selling additional units of the MLP to new investors in order to raise new capital. Issuance of new units result in dilution of the individual investor’s unit value, while increased borrowing by the Master Limited Partnership may create other problems for the investors (such as subordinating the investor’s right to payment to other, secured creditors).
- Generally, the higher the quarterly distribution rate stated in the MLP contract, the higher the management fee. This can create a conflict of interest for the management – the more they promise to pay, the more they will be paid. Consequently, the MLP may take additional risk as a business to find revenue to meet its payment obligations.
- Because MLPs are required to derive 90% of all revenues from the natural resources industry or real (i.e., “qualified income”), their performance is nearly entirely linked to the performance of these sectors and they are subject to the risks of those sectors. Like other oil and gas investment vehicles or real estate investment vehicles, MLPs are subject to the change in market conditions of those underlying sectors. When the price of oil and gas falls or when oil production declines, MLPs suffer. When there is a substantial selloff of MLPs, it forces the valuation of these publicly traded investments lower.
- Financial advisors and brokers typically receive high commissions and fees associated with MLPs, financial advisors and brokers recommending these products stand to gain by maximizing sales of MLPs and other high commission paying products. In some cases, investors may be advised to invest substantial or even over-concentrated percentages of their assets in these products.
- Because Master Limited Partnerships are extremely dependent on external sources of capital for growth, as described above, they can be particularly sensitive to reduced bank lending such as investors may see during market crises.
- As yield-based investments, MLPs carry interest rate risk and typically underperform in rising interest rate environments.
- Investors may overlook the overall return from an MLP, blinded by the promise of higher yields. However, high fees can erode the overall return on these investments.
- Some MLPs may return the investor’s principal, which may be perceived by the investor as actual yield.
Master Limited Partnership: Substantial Selloff and Decline in Value
By the end of 2015, market watchers and economists had written at length about these and other risks associated with MLPs as the Master Limited Partnership market had seen a substantial selloff and decline in value. Other commenters, though, continued to espouse the merits of MLPs as investment opportunities.
The White Law Group remains concerned about the potential for unsophisticated, average retail investors to be inappropriately led into investing in MLPs.
In the current low-yield environment, the promise of higher than average yields from MLPs makes them prime candidates for these products to be sold by financial advisors and brokers to retail investors seeking income. Unfortunately, because MLPs also include large sales commissions, there is a financial incentive for advisors and brokers to recommend these products even to investors who do not have the sophistication to be able to understand the risks they are taking by making this type of investment.
In short, Master Limited Partnerships are complex investments subject to numerous risks that are difficult for the average investor to learn of, let alone understand. They are only appropriate for sophisticated investors who are capable of understanding the risks they are taking with these investments and are able and willing to take those risks.
Update on March 11, 2020
The White Law Group continues to investigate the liability that brokerage firms may have for improperly recommending MLP investments (and, in particular) oil and gas MLPs.
According to Yahoo Finance on March 11, 2020, in the past 12 months the share price has dropped substantially for the following MLPs:
Foresight Energy – down 97%
MidCon Energy Partners – down 80%
Blueknight Energy – down 33% 6 months
Calumet Specialty Product Partners – down 43%
Cheniere Energy Partners – down 38%
DCP Midstream Partners LP – down 81%
Enable Midstream Partners LP – down 80%
Enlink Midstream Partners LP – down 84%
Genesis Energy LP – down 79%
Holly Energy Partners LP – down 51%
Magellan Midstream Partners – down 30%
NGL Energy Partners – down 77%
Rhino Resource Partners down 75%
Viper energy partners down 77%
Targa Resource Partners down 28%
Tallgrass Energy LP down 25%
Shell Midstream Partners down 46%
Plains All American Pipeline, L.P. down 69%
NuStar Energy LP down 60%
MPLX LP (MPLX) down 55 %
Ferrellgas Partners, L.P. (FGP) down 76%
Dynagas LNG Partners LP (DLNG) down 47%
Delek Logistics Partners, LP (DKL) down 63%
CSI Compressco LP (CCLP) – down 65%
Crestwood Equity Partners LP (CEQP) – down 77%
CNX Midstream Partners LP down 43 %
Ciner Resources LP (CINR) down 47%
Capital Product Partners L.P. (CPLP) down 44%
Black Stone Minerals, L.P. (BSM) down 60%
Antero Midstream Corporation (AM) down 71%
Some currently traded MLPs with sector and ticker symbol:
|8Point3 Energy Partners||Solar Energy||CAFD|
|Access Midstream||Natural Gas Midstream||ACMP|
|Alliance Bernstein||Financial Services||AB|
|Alliance Holdings GP LP||Coal||AHGP|
|Alliance Resource Partners||Coal||ARLP|
|Alon Partners USA||Refiner||ALDW|
|American Midstream Partners||Natural Gas Midstream||AMID|
|Amerigas Partners||Propane Marketing||APU|
|Antero Midstream Partners||Natural Gas Midstream||AM|
|Arc Logistic Partners||Crude/Refined Storage||ARCX|
|Archrock Partners (was Exterran Partners)||Contract Services Gas||APLP|
|Ares Management LP||Investment||ARES|
|Atlas Energy Group LLC||Pipelines and Production||ATLS|
|Atlas Pipeline Partners||Natural Gas Midstream||APL|
|Atlas Resource Partners (Monthly)||Oil and Gas Production||ARP|
|Black Stone Minerals||Oil and Gas Properties||BSM|
|Blackstone Group||Financial Services||BX|
|Blueknight Energy Partners||Oil and Gas Services||BKEP|
|Boardwalk Pipeline Partners||Natural Gas Midstream||BWP|
|Breitburn Energy LP (Monthly)||Oil and Gas Production||BBEP|
|Brookfield Infrastructure Partners||Utility/Energy/Timber||BIP|
|Brookfield Renewable Energy Partners||Renewable Energy||BEP|
|Buckeye Partners||Refined Product Pipeline||BPL|
|Calumet Specialty Products LP||Specialty Oil Products||CLMT|
|Capital Products Partners||Tanker Shipping||CPLP|
|Carlyle Group LP||Diversified||CG|
|Cedar Fair Partners||Amusement Parks||FUN|
|Cheniere Energy Partners||Natural Gas Midstream||CQP|
|Cheniere Energy Partners Holdings||Natural Gas Midstream||CQH|
|Ciner Resources (was OCI Resources)||Mining||CINR|
|CNX Coal Resources LP||Coal||CNXC|
|Columbia Pipeline Partners||Natural Gas Midstream||CPPL|
|CONE Midstream Partners||Midstream Oil and Gas||CNNX|
|Crestwood Equity Partners||Natural Gas Midstream||CEQP|
|Crestwood Midstream||Natural Gas Midstream||CMLP|
|CrossAmerica Partners||Motor Fuel Distribution||CAPL|
|CSI Compressco||Oil and Gas Services||CCLP|
|CVR Partners LP||Nitrogen Fertilizer||UAN|
|CVR Refining LP||Refiner||CVRR|
|DCP Midstream Partners||Natural Gas Midstream||DPM|
|Delek Logistics Partners||Oil Gathering/Pipeline||DKL|
|Dominion Midstream Partners||LNG Import/Export Pipel||DM|
|Dorchester Minerals||Oil and Gas Production||DMLP|
|Dynagas LNG Partners LP||Liquid Natural Gas Ship||DLNG|
|Eagle Rock Energy Partners||Natural Gas Prod, Pipel||EROC|
|Emerge Energy LP||Frac Sand||EMES|
|Enable Mistream Partners LP||Midstream Gas and Oil||ENBL|
|Enbridge Energy Partners||Oil/Gas Pipelines||EEP|
|Energy Transfer Equity Partners||Natural Gas Midstream||ETE|
|Energy Transfer Partners||Natural Gas Midstream||ETP|
|Enlink Midstream LLC (General Par)||Natural Gas Midstream||ENLC|
|Enlink Midstream LP||Natural Gas Midstream||ENLK|
|Enterprise Products Partners||Natural Gas Midstream||EPD|
|Enviva Partners||Biomass Energy||EVA|
|EQT Midstream LP||Natural Gas Midstream||EQM|
|EV Energy Partners LP||Oil and Gas Production||EVEP|
|Ferrellgas Partners||Propane Marketing||FGP|
|Foresight Energy LP||Coal Production||FELP|
|GasLog Partners||LNG Shipping||GLOP|
|Genesis Energy Partners||Oil/Gas Pipelines||GEL|
|Global Partners||Oil & Gas Marketing||GLP|
|Green Plains Partners||Ethanol Distribution||GPP|
|Hi-Crush Partners||Frac Sand||HCLP|
|Hoegh LNG Partners (a MLP)||LNG Services||HMLP|
|Holly Energy Partners||Crude & Refined Pipel||HEP|
|Icahn Enterprises LP||Diversified||IEP|
|JP Energy Partners LP||Oil and Gas Midstream||JPEP|
|Kinder Morgan Energy Partners||Pipelines/Storage||KMP|
|KKR and Co.||Financial||KKR|
|KNOT Offshore||Shuttle Tankers||KNOP|
|Landmark Infrastructure Partners||Cell Tower Real Estate||LMRK|
|Legacy Reserves LP||Oil and Gas Production||LGCY|
|Linn Energy LLC (Monthly)||Oil and Gas Production||LINE|
|LinnCO LLC (Monthly)||Oil and Gas Production||LNCO|
|LRR Energy LP||Oil and Gas Production||LRE|
|Magellan Midstream Partners||Crude & Refined Pipel||MMP|
|Markwest Energy Partners||Natural Gas Midstream||MWE|
|Marlin Midstream LP||Natural Gas Midstream||FISH|
|Martin Midstream Partners||Natural Gas Midstream||MMLP|
|Memorial Production Partners||Oil and Gas Production||MEMP|
|Mid-Con Energy Partners||Oil and Gas Production||MCEP|
|Midcoast Energy Partners||Natural Gas Midstream||MEP|
|MPLX LP||Crude Oil Midstream||MPLX|
|Natural Resource Partners||Coal||NRP|
|Navios Maritime Partners||Dry Bulk Shipping||NMM|
|Navios Maritime Midstream Partners||Tanker Shipping||NAP|
|New Source Energy Partners LP||Oil and Gas Production||NSLP|
|NGL Energy Partners||Oil and Gas Midstream||NGL|
|Niska Gas Storage Partners LLC||Natural Gas Midstream||NKA|
|Northern Tier Energy LP||Refiner||NTI|
|Nustar Energy Partners||Midstream Refined Prod||NS|
|Oaktree Capital Group||Investments||OAK|
|OilTanking Partners||Oil/Gas Storage||OILT|
|Oneok Partners||Natural Gas Midstream||OKS|
|PAA Natural Gas Storage||Natural Gas Midstream||PNG|
|PBF Logistics Partners||Oil/Refined Midstream||PBFX|
|Penn-Tex Midstream Partners||Natural Gas Midstream||PTXP|
|Phillips 66 Partners LP||Oil/Refined Pipelines||PSXP|
|Pioneer Southwest Energy||Oil and Gas Production||PSE|
|Plains All American Pipeline||Oil/Gas Pipelines||PAA|
|PVR Partners||Coal/Mid Stream Nat Gas||PVR|
|QEP Midstream||Oil and Gas Midstream||QEPM|
|QR Energy (Monthly)||Oil and Gas Production||QRE|
|Regency Energy Partners LP||Natural Gas Midstream||RGP|
|Rentech Nitrogen LP||Fertilizer||RNF|
|Rhino Resources LP||Coal||RNO|
|Rice Midstream Partners||Natural Gas Midstream||RMP|
|Rose Rock Midstream LP||Oil Pipelines and Storage||RRMS|
|Shell Midstream Partners||Crude/Refined Pipelines||SHLX|
|Southcross Energy LP||Natural Gas Midstream||SXE|
|Spectra Energy Partners||Natural Gas Midstream||SEP|
|Sprague Resources||Wholesale Fuels||SRLP|
|Star Gas Partners||Heating Oil||SGU|
|Suburban Propane Partners||Fuel Distribution||SPH|
|Summit Midstream Partners||Natural Gas Midstream||SMLP|
|SunCoke Energy Partners LP||Coke Manufacturing||SXCP|
|Sunoco Logistic Partners||Crude & Refined Pipel||SXL|
|Sunoco LP (was Susser)||Fuel Distribution||SUN|
|Tallgrass Energy LP||Natural Gas Midstream||TEP|
|Tallgrass Energy GP||Natural Gas Midstream||TEGP|
|Targa Resource Partners LP||Natural Gas Midstream||NGLS|
|TC Pipelines||Natural Gas Midstream||TCP|
|Teekay LNG Partners||Liquid Natural Gas Ship||TGP|
|Teekay Offshore Partners LP||Shuttle Tankers||TOO|
|Tesoro Logistics LP||Oil Terminals||TLLP|
|Transmontaigne Partners||Refined Product Storage||TLP|
|Transocean Partners LLC||Deepwater Driller||RIGP|
|USA Compression Partners||Natural Gas Midstream||USAC|
|Valero Energy Partners LP||Midstream Crude Oil||VLP|
|Vanguard Natural Res LLC (Monthly)||Oil and Gas Production||VNR|
|Viper Energy||Oil and Gas Royalty||VNOM|
|VTTI Energy Partners||Storage||VTTI|
|Western Gas Equity Partners||Natural Gas Midstream||WGP|
|Western Gas Partners||Natural Gas Midstream||WES|
|Western Refining Logistics||Gas/Oil Midstream||WNRL|
|Westlake Chemical Partners||Ethylene Production||WLKP|
|Westmoreland Resource Partners||Coal||WMLP|
|Williams Partners||Natural Gas Midstream||WPZ|
|World Point Terminals LP||Crude and Refined Storage||WPT|
Brokerage firms that sell oil and gas MLPs are required to perform adequate due diligence on the investments to ensure a reasonable likelihood of success, and to evaluate whether the investments are suitable in light of the client’s age, net worth, investment experience, and investment objectives. Firms that fail to perform adequate due diligence, or that make unsuitable recommendations, can be held responsible for losses in a FINRA arbitration claim.
Free Consultation with a Securities Attorney
If you suffered losses investing in an oil and gas MLP and would like to discuss your litigation options, please call The White Law Group at 888-637-5510 for a free consultation.
The White Law Group is a national securities arbitration, securities fraud, and investor protection law firm with offices in Chicago, Illinois and Franklin, Tennessee. The firm represents investors throughout the country in FINRA arbitration claims against their brokerage firm.
For more information on The White Law Group, visit www.whitesecuritieslaw.com.