Falling oil prices have captured headlines recently and generated headwinds for many stock sectors that have related businesses. Oil producers and refiners, as well as integrated oil companies, have experienced significant declines in their share prices over the past two months as their revenue streams come under pressure. One sector that has also suffered but should be insulated from declining oil prices are the master limited partnerships (MLPs).
A master limited partnership is a publicly traded partnership where the limited partner receives income distributions from the MLP’s cash flow. The general partner is responsible for managing the operations of the MLP. Approximately 85% of master limited partnerships are energy related.
Energy MLPs are generally involved in the transportation and storage of crude oil, oil products such as gasoline and heating oil, and natural gas transportation and storage. A simple way to think about how MLP revenue is generated is to think of these companies as toll operators. Every time oil or natural gas needs to move through the highway of pipelines around the United States, the MLP will charge a toll. Since MLPs generate income from the volume of oil that is pushed through the system rather than the price, their revenues should be somewhat protected from declining oil prices.
MLPs make robust long-term income investments that can also deliver strong income-related returns. However, it’s important to understand that the cost of funding helps determine the viability of this industry. The costs of capital (which include both debt and equity) can be found in an MLP’s quarterly unaudited financial statement known as the 10Q form.
Falling oil prices can initially result in a decline in the price of the MLPs, but over time, these stocks will likely hold up as