January 18, 2016 Comments (0) Blog

Master Limited Partnerships (MLPs) Securities Investigation

Master Limited Partnerships (MLPs) Securities Investigation, featured by top securities fraud attorneys, The White Law Group

MLP Investment Losses – updated 10/16/19

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.

What is a Master Limited Partnership (MLP)?

In the United States, Master Limited Partnerships (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 are MLPs Sold?

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?

MLP’s are complex investment vehicles 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.

MLPs: 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.

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.

Some currently traded MLPs include:

MLP Sector 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
OCI Partners Methanol/Ammonia OCIP
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
Petrologistics Propylene Production PDH
Phillips 66 Partners LP Oil/Refined Pipelines PSXP
Pioneer Southwest Energy Oil and Gas Production PSE
Plains All American Pipeline Oil/Gas Pipelines PAA
Pope Resources Timber POPE
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
Stonmor Partners Cemeteries STON
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
Terra Nitrogen Fertilizer TNH
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

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.