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October 16, 2008 – Comments (0) | RELATED TICKERS: EPE.DL2 , MGG , ENLK

I've previously recommended several midstream master limited partnerships. These are tax advantaged securities that build and maintain pipelines from oil and/or gas fields to consumers. These are generally paid based on how much oil/gas flows through their pipelines and aren't exposed directly to commodity price risk. They can be a good way to invest in emerging shale plays like the Barnett Shale (e.g. through Crosstex Energy XTXI and its limited partner XTEX).

MLPs have sold off with the energy sector. However, investors may be missing the fact that they aren't directly exposed to commodity price risk. Many of them yield over 10%. A number of MLPs have recently been raising their distributions. Enterprise GP holdings (EPE) holds general partner stakes in three MLPs, all of which boosted their distributions. EPE did the same just today, and their distributions are up by a bit over 15% from this time last year. Magellan Midstream Holdings (MGG) and its limited partnership also raised their distributions. MGG's year end distribution is up by over 20% from its Q3 2007 distribution.

I especially like these two publicly traded general partners. General partners have incentive distribution rights that go up exponentially as they raise limited partner distributions. Past a certain level of total distributions, the general partners will be able to grow their distribution rate at increasing levels.

I would also like to recommend Crosstex XTEX. This isn't a general partner. However, it's yielding over 18% today. The market seems to be worried over damage from Hurricane Ike and their access to capital. However, the damage from Ikewas survivable. The company's CEO remarked recently that the market was failing to distinguish companies that needed access to the capital markets to survive from those which needed access to capital to execute a growth plan. Crosstex does not depend on the capital markets to survive. Even if Crosstex is unable to grow for several years it is worth a lot more than present prices.

 Investors should know that MLPs are tax advantaged and paperwork disadvantaged. Most or all of the distributions will be tax free. The partnership returns capital and you reduce your cost basis at the end of the year, so that gains are taxed at the long term rate when you sell. However, you have to file a K-1 form with the IRS for each MLP you own. MLPs are considered to be doing business in all the statesthey run through, and if you own enough, you might be liable for several state income tax forms. Small investors probably won't incur enough distributions to meet the minimums for filing state taxes, though.

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