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MLP sector 'not as good as it used to be,' but researcher has room for optimism

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MLP sector 'not as good as it used to be,' but researcher has room for optimism

At a time when energy pipeline master limited partnerships' corporate structure faces more questions than ever, a sector researcher said she remains optimistic that MLPs will continue to provide value for investors even if more partnerships choose to become corporations.

MLPs have traditionally produced substantially higher rates of return than asset classes like utilities due to their status as pass-through entities. Instead of paying corporate taxes, partnerships pay distributions to their shareholders, who then pay individual taxes on those payments. But the 2014 commodity price crash sent MLP investors running as many management teams stabilized their balance sheets by cutting distributions.

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Maria Halmo, director of research at Alerian.

Source: S&P Global Market Intelligence

The bellwether Alerian Master Limited Partnership Index rebounded by 6% in January after a 13% fall in 2017. Maria Halmo, director of research at Alerian, said during a Pittsburgh conference held by Hart Energy that MLPs' 7% average distribution yield continues to outpace utilities, bonds and the S&P 500. "You're not finding any large yields anywhere else," she said Feb. 1.

Still, the investors returning to the midstream sector prefer businesses that have simplified their structures by either converting to corporations or eliminating the general partner's incentive distribution rights. While several MLPs have responded to shareholders' demands by making those changes, equity analysts are concerned about others, like Energy Transfer Partners LP and Antero Midstream Partners LP, whose holding companies do not feel obligated to address the issue in the near-term.

Halmo acknowledged that more midstream management teams may avoid the MLP structure following the new tax law that reduced the corporate rate to 21% from 35%.

"It's not as good as it used to be to be an MLP," she said. "New IPOs, maybe we'll see fewer of them come public as an MLP, maybe they'll stick to the C corporation structure because you get a broader investor base, you're able to be part of the S&P 500 and … partnerships are not permitted to be part of the [S&P 500]."

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While the Tax Cuts and Jobs Act maintained a tax advantage MLPs have over corporations by including a 20% credit for income from pass-through businesses, the new tax regime offers a 17% lowering for high-income MLP investors, compared to 22% for corporations.

One of the Alerian index and exchange-traded fund's new competitors, meanwhile, is confident that broader products will outperform the MLP-centric index as the trend toward simplification continues.

"We've got a better product for less money. … [The Alerian] is structurally flawed and expensive," SL Advisors LLC Managing Partner Simon Lack, whose investment advisory firm launched the American Energy Independence Index and its ETF in 2017, said in an interview. "The [Alerian MLP ETF] was created when [energy infrastructure] was mostly an MLP business, and I think that time has passed."

Halmo said the lower corporate tax rate will benefit MLP-focused ETFs like the Alerian. "If an ETF owns more than 25% MLPs, it has to pay taxes at a corporate rate, so that's going to help products like [the Alerian], which are 100% MLPs," she said.