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December 15, 2013 at 07:22 AM
Master limited partnerships (MLPs) have proven their value in the asset allocation mix. As an asset class, they generate reliable, growing distributions for income investors. Plus, their mid- and long-term total returns have outpaced other investments such as REITs, utility stocks and the broad market indices.
A recent study from New York-based Yorkville Capital Management sheds some light on the variable distribution MLP subcategory.
These MLPs have been in the news lately as one company that sells frac sand, Emerge Energy Services (EMES), has seen its units’ price increase this year from the mid-teens in May to $40 by November.
The Yorkville study notes that there are several key differences between variable distribution (so-called “variables”) and traditional MLPs (or “traditionals”).
First, variables lack an internally mandated minimum quarterly distribution.
“Instead of generally maintaining or increasing distributions, variable MLPs will pay out distributions each quarter that vary with quarterly cash flows of the business,” the report explains.
Second, variables can have a narrower business focus.
“The MLPs which have elected for the variable structures generally have single or few assets and often unhedged exposure to commodity prices,” according to Yorkville.
Third, they encompass a smaller number of partnerships than traditionals. There are 100 publicly traded MLPs but only nine of them are variables.
Otherwise, Yorkville notes, variables are essentially the same as traditional MLPs found in the energy pipeline business.
Both types of MLPs own U.S. energy assets, act as pass-through entities in which unit holders receive K-1s and trade on public stock exchanges.
Variables’ Origin
The report reviews variables’ history, which is important for evaluating the group’s performance.
The first variable, Terra Nitrogen (THN), a producer of nitrogen fertilizer, went public in 1994. The second, Dorchester Minerals (DMLP), emerged in 2003.
No new variables came to market between 2004 and 2011, when activity began to pick up.
