Master Limited Partnerships: High Yield, High Risk

by | Dec 8, 2014 | Videos, Asset Management

In this week’s Mullooly Asset Management video, Tom talks about Master Limited Partnerships. These investments trade like stocks on an exchange and pay out distributions to their shareholders. The current low interest rate environment has attracted many yield seeking investors to MLP’s.

Of the 42 MLP’s we track at Mullooly Asset Management, 28 are oil or oil service related and 11 are gas pipeline companies. Most Master Limited Partnerships are involved in the energy sector. The current average yield of the 42 MLP’s we track is 7.1%. This is way higher than the current yield on any Treasury or investment grade bond, hence the attention from yield seekers.

What most yield seeking investors don’t fully understand is the risk involved with Master Limited Partnerships.

Two recent examples of MLP risk are SeaDrill Limited and Rhino Resource Partners LP.

  • Rhino Resource Partners is involved with coal mining. In late October, they reduced their distribution from .44/unit (per quarter) to .05/unit (per quarter). The price of RNO stock fell 59% immediately.
  • SeaDrill Limited is an offshore drilling company that announced they were suspending their distribution just before Thanksgiving. Prior to the announcement, the stock (SDRL) was $21 and today it’s trading for under $12.

Investors should know that MLP distributions can be reduced or eliminated at ANY time, and the effects of such announcements tend to be catastrophic.

Most institutions stay away from MLP’s because of certain tax rules that make them less advantageous to own on their level. Consequently, Master Limited Partnership units often end up in the retail portfolios of yield seeking investors. We wonder if they were interested in the risk levels associated with MLP’s or if they were even made aware of them before investing?

Another interesting development to note is the growth of energy related high yield bonds. We’ve discussed the risks of high yield bonds on our podcast before here: A recent Wall Street Journal article put things into perspective stating:

“Energy companies, the fastest-growing segment of the high-yield bond market in recent years, account for nearly 18% of all outstanding high-yield bonds, up from 9% in 2009, according to J.P. Morgan.”

The same risk associated with MLP’s can be found in these energy sector high yield bonds and the bond funds that hold them. Investors need to know this!

Whether you’re looking for yield from investments like Master Limited Partnerships or high yield bond funds, please know that there is no such thing as a free lunch. There are plenty of risks involved with these yield-producing investments. Know what your money is invested in!


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