Some MLPs May Be Worth the Confusion

NEW YORK (TheStreet) -- If you own units (shares) of a Master Limited Partnership (MLP) you'll want to read this article especially if it makes you yawn with sleepiness.

Not that I want my articles to have a soporific impact on my readers, but if you can simultaneously be better informed about MLPs and overcome insomnia I will be especially delighted.

You might already know that MLPs avoid corporate taxation and are supposed to pay out the lion's share of their distributable cash flow (DCF) to shareholders who often are referred to as "partners."

Well listen closely partner. I have owned MLPs before and I've learned that they can be a tax-reporting nightmare. Yet I'm not opposed at all that many of the distributions from DCF are tax-deferred.

Did you know that today energy-related MLPs number more than one hundred and according to my research have a combined market value of nearly $500 billion dollars! But that's not the most impressive part.

In the past 15 years the entire MLP sector has had a total return, including distributions, of nearly 900%. That's amazing when one realizes that the S&P 500 "only" doubled during the same period.

As an investor and analyst I'm mainly focused on the energy-related MLPs. I look for ones where a diversified energy company spins off the energy infrastructure parts of its business into MLPs.

This is why the debut this week of an ETF which focuses on global energy structure MLPs and tracks the "Solactive and Energy Infrastructure Index" caught my attention.

The Global X MLP & Energy Infrastructure ETF ( MLPX) opened on Wednesday at $15.05 and closed Friday at $14.94.

The Solactive and Energy Infrastructure Index is intended to give investors a means of tracking the performance of MLPs and energy infrastructure corporations. Midstream energy infrastructure MLPs and corporations mainly own and operate assets used in energy logistics.

This includes, but isn't limited to, pipelines, storage facilities and other assets used in transporting, storing, gathering, and processing natural gas, natural gas liquids, crude oil or refined products.

To see a fact sheet about MLPX is to realize what a diverse and often mysterious world these MLPs operate in. They're impacted by interest rates since they rely heavily on borrowing to finance their growth.

That's mainly because they have to pay out most of their DCF to their "partners." So how can one see a list of these kinds of MLPs? It isn't easy. One way is to look at an ETF that's been around more than five days.

The Yorkville High Income Infrastructure MLP ETF ( YMLI) which debuted way back in Feb. 2013 includes names like Tesoro Logistics ( TLLP) with its measly 3.94% payout yield and MarkWest Energy Partners ( MWE) with its more generous 4.8% yield.

Two MLPs that I'm interested in include CVR Refining ( CVRR) which recently lowered its distribution guidance from a range of $5.50 to $6.50 for this year down to $4.10 to $4.80.

That's still a yield-to-price in the middle of that distribution range of over 17% based on Friday's closing price of $26.37. CVRR has the advantage of purchasing or producing its crude oil from the Bakken Shale and Canada at a discounted price to West Texas Intermediate oil prices.

CVRR is not primarily an energy infrastructure MLP but one that's in the oil refinery business. The fact that it owns and operates the Coffeyville crude oil refinery located about 100 miles northeast of Cushing, Okla., the geographic hub of the energy distribution network of the United States, makes it very a very competitive refinery. By its proximity saves transportation costs and other related expenses.

It also owns the Wynnewood crude oil refinery located approximately 65 miles south of Oklahoma City. These locations save money and time in the distribution process of refined oil products.

It also owns and operates approximately 350 miles of feeder and trunk pipelines; 125 crude oil transports; 6.0 million barrels of owned and leased crude oil storage capacity storage tanks; and a network of crude oil gathering tank farm, as well as a 145,000 bpd pipeline system that transports crude oil from its Broome Station tank farm to its Coffeyville crude oil refinery.

CVRR is more volatile than pure energy infrastructure MLPs like Sunoco Logistics Partners ( SXL) but with CVRR you're investing alongside the likes of Carl Icahn who as of March 31 owned 4 million shares.

SXL is in the crude oil pipeline business. It's also one of the holdings in YMLI. SXL also engages in the transportation, terminalling, and storage of crude oil and refined products in the United States. It's a lucrative, steady business that has helped it to offer unit holders a growing DCF yield.

In fact in late July SXL raised its quarterly distribution by 5% sequentially and 28% year over year to 60 cents per unit or $2.40 per unit annualized. This represented the thirty-third consecutive quarterly distribution increase and that's the kind of partner-friendly history MLP investors love.

Last Thursday SXL reported strong second-quarter 2013 earnings and revenue results. Sunoco's diluted earnings per unit of $1.08 handily surpassed the Zacks Consensus Estimate of 88 cents. Revenues of $4,311.0 million were up 30.1% from second quarter 2012 and beat the Consensus Estimate of $3,457.0 million. These are the kind of results to look for in an MLP with a promising future.

Realize that many MLPs are trading at or near 52-week highs and a number of MLP analysts are warning that the DCF yield, which is net earnings plus depreciation and amortization divided by the unit price, is high by historical standards.

This suggests that many MLPs in the energy and energy infrastructure spaces are richly valued. A few may be considered overvalued and are trading at more than 20 times forward (one-year) earnings.

The following 5-year chart of the ALPS Alerian MLP ETF ( AMLP) which tracks the performance of the Alerian MLP Infrastructure Index tells part of the story. It's another diversified way to invest gradually in this lucrative sector. AMLP Chart AMLP data by YCharts

Like many of its top holdings, the chart of AMLP shows the peaks and troughs that speak to the volatility of the sector. Patient, seasonal investing and buying in tranches as pullbacks occur is the smartest way to invest in these MLP ETFs or the best managed of the individual MLPs.

At the time of publication the author is long CVRR.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ¿herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.

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