What Is an MLP?
- Potential to generate income while investing in energy infrastructure
- MLPs are an alternative investment that may help diversify traditional portfolios
- Mutual fund structure simplifies MLPs’ complex tax reporting for investors
Whenever you and millions of other Americans drive a car, turn on a light or cook a meal, you’re using energy that’s delivered through a huge national infrastructure.
What if you could generate income by investing in that infrastructure and diversify your portfolio with an alternative to stocks and bonds at the same time?
Energy infrastructure Master Limited Partnerships, or MLPs, can help you achieve this goal.
MLPs are the publicly traded partnerships that make up a large part of the nation’s energy infrastructure. Energy infrastructure MLPs transport, store and process hydrocarbons such as oil, natural gas, natural gas liquids and refined products. These midstream MLPs can be likened to a national highway where cars pay a “toll” to travel from state to state. Similarly, energy infrastructure MLPs are designed to help earn steady income in the form of “tolls” paid to transport hydrocarbons between the upstream source and the end user.
Even though the price of oil and natural gas will fluctuate, the income generated from these “toll road” businesses is not generally affected by such swings in price because tolls are based on the volume of oil or natural gas that MLPs move.
Because energy infrastructure is so vital to the economy, MLPs currently receive preferred tax treatment under the U.S. tax code.
What’s more, as America increases oil and natural gas production, there’s likely to be more and more “traffic” to collect tolls on. For midstream MLPs, that may mean more revenue that may be used to pay investors in the form of taxable distributions and tax-deferred return of capital.
Typically, MLPs make quarterly distributions to the limited partners, creating a potentially attractive steady income stream.
And there is more to the story. Not only do MLPs realize favorable tax treatment, many benefit from periodic toll increases that are included in their contracts that help keep pace with inflation – potentially providing an inflation hedge as well.
But MLPs have been a headache to own because of complex tax reporting.
Since the creation of the first open-end MLP mutual fund in 2010, investing in MLPs has become simpler, and more investors have been able to gain exposure to this alternative asset class. These MLP open-end mutual funds handle the tax reporting and the investor receives a form 1099.
If you’re looking to diversify your portfolio with an alternative to equities and fixed income that has historically provided an income stream and kept pace with inflation, an MLP open-end mutual fund may be appropriate for you.
Past Performance does not guarantee future results.
This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice or to avoid legal penalties that may be imposed under U.S. federal tax laws. Investors should contact their own legal or tax advisors to learn more about the rules that may affect individual situations.
Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution, and voting rights. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. Diversification does not guarantee profit or protect against loss.
Under the Internal Revenue Code of 1986, MLPs are treated as a partnership for federal income tax purposes as long as 90% or more of the MLP’s gross income for every taxable year consists of qualifying income.
MLPs may trade less frequently than larger companies due to their smaller capitalizations, which may result in erratic price movement or difficulty in buying or selling. MLPs are subject to significant regulation and may be adversely affected by changes in the regulatory environment including the risk that an MLP could lose its tax status as a partnership. Additional management fees and other expenses are associated with investing in MLP funds. Some Oppenheimer SteelPath Funds will be subject to certain MLP tax risks and risks associated with accounting for its deferred tax liability which could materially reduce the net asset value. An investment in the Fund does not offer the tax benefits of a direct investment in an MLP.
Most Oppenheimer SteelPath Funds are organized as a Subchapter “C” Corporation, which means that they will pay federal, state and local income taxes at a corporate rate (currently as high as 35%) based on their taxable income. The potential benefit of investing in MLPs generally is the treatment of them as partnerships for federal income purposes. The Funds invest in MLPs, but since the Funds are corporations, they will be taxed at the Fund level, which in turn will reduce the amount of cash available for distribution, and which would result in the reduction of the Funds’ net asset value.
To the extent that a Fund obtains leverage through borrowings, there will be the potential for greater gains and the risk of magnified losses. Investing in debt securities involves additional risks including interest rate risk, credit risk, duration risk, and duplication of advisory fees and other expenses. High yield securities involve more risks than investment grade securities and tend to be more sensitive to economic conditions. Private equity investments may be subject to greater risks than investments in publicly traded companies due to limited public information and lack of regulatory oversight.
Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.
Before investing in any of the Oppenheimer funds, investors should carefully consider a fund's investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting oppenheimerfunds.com, or calling 1.800.CALL OPP (225.5677). Read prospectuses and summary prospectuses carefully before investing.
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