Master Limited Partnerships, or MLPs, are engaged in the transportation, storage, processing, refining, marketing, exploration, production or mining of natural resources. By confining their operations to these specific activities, their equity interests, or units, are able to trade on public securities exchanges, like the shares of a corporation, but without entity-level taxation. Of the more than 100 partnerships that OFI SteelPath follows closely, approximately 80% trade on the New York Stock Exchange (NYSE) with nearly all of those remaining trading on the NASDAQ. MLPs must make public filings with the Securities and Exchange Commission and must file 10-Ks, 10-Qs, and notices of material changes like any publicly traded corporation. MLPs are subject to the recordkeeping and disclosure requirements of the Sarbanes-Oxley Act.
Since 1996, the MLP asset class, as measured by the Alerian MLP Index (NYSE: AMZ), has produced a compound annual total return of approximately 8.2% versus 6.8% for the S&P500 Index.1 These strong returns were generated through a combination of current yield and consistent distribution growth largely driven by the performance of energy infrastructure MLPs, the primary MLP subsector. Energy infrastructure MLPs own and operate the long-lived, high value physical assets needed to solve the logistical challenges that stand between the production of raw natural resources (at often remote locations) and the delivery of resources in a usable form to the consumer of those natural resources such as refineries, utilities and chemical plants. These assets include pipelines, treating and processing plants, terminals, and storage facilities as well as certain truck, rail and shipping assets.
* Past performance does not guarantee future results. Based on the historical performance of the companies in the MLP sector.
Other MLP subsectors include oil and gas exploration and production (E&P), propane distribution, shipping, coal production, natural gas compression and refining, as well as several others. Today, the market capitalization of the energy MLP asset class totals more than $590 billion.2
Of the subsectors or businesses described above, only energy infrastructure is unique, or nearly so, to the MLP asset class. Nearly every pure-play energy infrastructure operator has chosen to organize as an MLP with only a handful organized as corporations. Importantly, energy infrastructure operators have historically generated predictable and growing cash flows (and therefore distributions) predicated on the following:
- Long-lived, high value physical assets that play a critical, must-run role within the energy value chain.
- Assets in place tend to benefit from substantial barriers to entry and may capture attractive organic investment opportunities.
- Operating leverage which can enhance the benefit of throughput growth.
- Tariff increase potential, with certain assets benefiting from inflation-linked tariff adjustments.
For more information and further detail, please read our full OFI SteelPath Primer.
1 Source: Bloomberg. Return data calculated through 9/30/2015. Past performance does not guarantee future results.↩
2 Source: Wells Fargo Securities MLP Monthly, July 2014.↩
Special Risks: 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. Each Fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. 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. 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. Additional management fees and other expenses are associated with investing in MLP funds. The Oppenheimer SteelPath MLP Funds are subject to certain MLP tax risks. An investment in an Oppenheimer SteelPath MLP Fund does not offer the same tax benefits of a direct investment in an MLP. The Funds are organized as Subchapter “C” Corporations and are subject to U.S. federal income tax on taxable income at the corporate tax rate (currently as high as 35%) as well as state and local income taxes. The potential tax benefit of investing in MLPs depend on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation, its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution which could result in a reduction of the fund’s value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV and as a result a MLP fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.