MLPs are a bit of a pain for individual investors, too. Much of the income they produce is tax-deferred until you sell the shares -- a nice perk. But the downside is that you must file additional federal tax forms, as well as tax returns in the states in which the pipelines operate. MLPs are best for investors who pay someone else to do their tax returns. Also, you shouldn't hold them in an IRA or other type of tax-deferred account because you could get hit with a tax on something known as unrelated business taxable income.
We also recommend avoiding energy partnerships that are in the business of exploring and drilling for new oil and gas wells, or selling coal, propane or other energy products. Their payouts are more likely to stay intact.
In addition, we like those that have a long track record of rising payouts, lots of new projects in the works and little need for new borrowing in the short term. These five partnerships fit the profile:. Energy Transfer Partners symbol ETP runs 17, miles of pipelines that stretch from the West Coast to the Gulf of Mexico and handle about one-fifth of the nation's natural-gas consumption.
Enterprise Products Partners EPD operates 35, miles of pipelines that carry natural gas, natural-gas liquids and crude oil from U. Headquartered in Houston, the firm has raised its distribution 17 consecutive quarters. Based in Houston, Kinder Morgan is also the biggest North American supplier of carbon dioxide, a key agent for boosting production in aging oil fields. Magellan Midstream Partners MMP operates almost 10, miles of pipelines that carry petroleum and ammonia through the country's midsection.
The Tulsa-based firm also runs 80 marine and inland-storage terminals, and it is talking to another pipeline firm about building an ethanol pipeline from the Midwest to the East Coast. Plains All American Pipeline PAA moves three million barrels per day of crude oil, refined products and natural-gas liquids through a pipeline system that runs through 40 states and five Canadian provinces.
Spreading your bets over a number of pipeline partnerships is always a good idea. We recommend buying a selection of the companies named above. You could also buy a closed-end mutual fund that invests broadly in energy MLPs and other energy income securities. Unlike regular mutual funds, closed-end funds issue a limited number of shares, which trade just like stocks. While the corporations stand to benefit from tax breaks and are assured a profit, the environmental and safety risks of the pipelines will be absorbed by the communities they pass through and by everyone affected by the rapidly changing climate.
And everyone wants their pipeline committed as soon as possible. Even if more natural gas is needed to replace retiring coal-fired plants, as many industry experts argue, does that mean that we need more pipeline construction? Pipeline developers must demonstrate to the Federal Energy Regulatory Commission that they have customers for the gas and thereby show a need for the natural gas being shipped.
For both the Atlantic Coast and Mountain Valley Pipelines, the vast majority of the gas will be sold to subsidiaries of the parent companies building the pipelines. For some, the promise of new jobs is a major selling point of the pipeline projects. But any large-scale employment during construction is short-lived, and these jobs may or may not go to local residents who need them. Projected long-term employment numbers for operating the pipelines and compressor stations are significantly lower than during the construction phase.
Compare this with jobs in the solar sector: employment in Virginia is strong, North Carolina is booming and West Virginia has a lot of room for growth. The companies building the Atlantic Coast and Mountain Valley Pipelines stand to profit from these infrastructure projects. When granting permits, the Federal Energy Regulatory Commission guarantees the companies building the pipelines a profit by authorizing them to adjust their rates on transporting gas. At the same time, the partnerships financing the pipelines — such as Dominion Midstream Partners, which has indirect ownership of the Atlantic Coast Pipeline, and EQT Midstream Partners, a lead partner in the Mountain Valley Pipeline project, are not required to pay federal taxes.
According to the New York Times , Duke has paid no total income tax between and Guaranteed profits and low tax rates are just two of the benefits the tax codes grant companies in the energy sector. Under the previous administration, the United States worked with other nations to set a path toward limiting the severity of climate change, first in Copenhagen and later in Paris.
The United States proposed to reduce its greenhouse gas emissions significantly over the coming two decades. Even if sales of electric cars increase, which we think they will, the number of gasoline cars on the roads will remain stubbornly high for a long time.
Electric semi-trucks are a decade behind electric cars, and airplanes are behind semi-trucks. Also, as demand for gasoline declines, pipelines will be able to raise prices like cigarette companies are doing today. As things come back to post-pandemic normal and its free cash flows grow, the company will either buy back stock or increase its dividend. The stock finished trading on Feb. Its main focus is on natural gas. Size is important in this industry.
Pipelines are networks that connect producers with refineries and transportation hubs. EPD was not shy about spending money on new pipelines over the past five years, but neither was it shy about issuing new units this was another reason for our initial hesitation about the company. The Duncans have been a significant buyer of EPD stock lately. The stock closed on Feb. This speculative market will come to an end. Learn more from The 6 Commandments of Value Investing.
To read more articles, go to ContrarianEdge. Vitaliy Katsenelson is chief investment officer at Investment Management Associates in Denver, which as of publication holds long positions in Magellan Midstream Partners and Enterprise Products Partners.
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