Master limited partnerships (MLPs) may be getting a big shot in the arm in the upcoming year. And it’s all because of President Donald Trump. We know that Trump is already a fan of pipelines — his actions on the Keystone XL and infrastructure plans confirm this. The big win for MLPs may come from his plans to reform taxes.
Trump’s proposal to slash tax rates on pass-through businesses will be a major windfall for investors in MLPs, as it could send the tax rates on the sectors high distributions down to just 15%.
Right now, MLPs are taxed at the tax rate for individuals, which can be as high as 39.6%.
But here’s the real beauty of Trump’s tax proposals: MLPs would be able to defer taxes for years before the bill comes due. Trump’s proposed tax plan is enhancing an already enhanced tax-structure. If that doesn’t get your mojo going, consider that MLP sectors average 4% to 7% distribution yields.
With tax reform being the administration’s next issue to tackle, MLPs could once again be a hot ticket for investors. With that in mind, here are five MLPs that could benefit from Trump’s tax plans.
Trump’s Tax Plan MLPs: MPLX LP (MPLX)
Distribution Yield: 6.6%
Like many refiners Marathon Petroleum (NYSE:MPC) spun out its pipeline operations as a separate MLP to save on taxes. However, its spinoff MPLX LP (NYSE:MPLX) hasn’t looked back. Yes, it still gets quite a bit of cash from funneling crude oil and gasoline to and from its former parent. But these days, MPLX is all about growth. That’s because MPLX has expanded beyond just holding refining-based assets.
Its shrewd buyout of MarkWest Energy Partners allowed MPLX to become the fourth-largest MLP in the nation. Today, the firm holds plenty of natural gas pipelines and processing equipment in the prolific Marcellus shale as well as storage farms, crude oil pipelines and other midstream assets. All in all, its system continues to see higher volumes and cash flows.
Even better is that MPLX has continued to grow via organic projects in these areas as well as through drop-downs from its parent. For example, back in March, MPC added more than $2 billion in assets to MPLX. These sorts of deals instantly boost cash flows at the MLP.
For investors, it’s resulted in a steady diet of dividend increases. Since its spinoff in 2012, MPLX has managed to increase its dividend by over 200%. That dividend and continued growth will only be enhanced by Trump’s pending tax changes.
Trump’s Tax Plan MLPs: Western Gas Partners (WES)
Distribution Yield: 6.4%
As we saw with previously mentioned MPLX, for MLPs it’s all about the right partner. While Western Gas Partners, LP (NYSE:WES) may not be well known, it has a great partner in Anadarko Petroleum Corporation (NYSE:APC).
APC is one of the largest independent E&P firms on the planet and it founded WES to hold its vast array of midstream infrastructure. Much of this was connected to already producing wells and gathering lines in major production regions like the Marcellus and Eagle Ford.
There’s no production risk here. Anadarko simply needs to get this oil or natural gas to market and it sends the supply through WES’s pipelines. It’s as easy as that. This built-in relationship provides WES with steady and uninterrupted throughput in its pipelines.
But here is where it gets interesting. As APC expands, it has continued to add new gathering systems into its umbrella. And it’s continued to drop those down into WES. Moreover, Western has finally started to allow third-party producers into its key systems and recent asset sales from Anadarko have brought in more customers at better contract rates. That’s a source of revenues and cash flows that have been missing from WES’s pie.
With its “Year of Action” underway, investors will be treated to higher dividend growth and steady capital appreciation from Western Gas’ shares.
Trump’s Tax Plan MLPs: Enterprise Products Partners (EPD)
Distribution Yield: 6.1%
When it comes to MLPs, you can’t go wrong with classics such as Enterprise Products Partners L.P. (NYSE:EPD). EPD is one of the largest midstream firms on the planet and features a large, diverse asset base across multiple energy commodities.
This includes tens of thousands miles worth of pipelines, salt cavern storage facilities, natural gas processing plants, export/import terminals, barges and other midstream holdings. All of which are located in the areas of the country that continue to see strong production profiles and reserves. Perhaps more importantly, the vast bulk of Enterprise’s assets are tied to take or pay, long-term, toll-road-like contracts.
But EPD isn’t a slow, plodding dinosaur. There’s growth here as well.
Part of that growth is coming from chemicals and NGL/ethane expansion. The firm is currently working on a $2.9 billion propane dehydrogenation (PDH) facility that will help create basic chemical feedstocks. This is a first-mover advantage for MLPs and will provide EPD a new source of revenue as producers begin taking advantage of abundant natural gas reserves in the U.S.
For investors, it’ll only help drive EPD’s dividend growth further. A dividend that has grown by more than 418% since its IPO.
Trump’s Tax Plan MLPs: EQT Midstream Partners LP (EQM)
Distribution Yield: 5%
When E&P firm EQT Corporation (NYSE:EQT) arrived in Pennsylvania’s rich Marcellus shale it basically was alone in the wilderness. That first-mover status was great in that it allowed EQT to amass a big acreage position for cheap. The only problem was there was no way to ship its natural gas back to the rest of the country.
That meant building out its own gathering lines and terminals. It then plopped that midstream infrastructure into EQT Midstream Partners LP (NYSE:EQM). And investors haven’t looked back.
EQM has about 3,000 miles worth of gathering and transmission lines in its system. The vast bulk of which are used by EQT to move its own production in the Marcellus and related regions. Like with WES, these are already producing wells and provide plenty of volumes/cash flows in EQM’s system. And like APC, EQT still has plenty of midstream assets to drop down into its MLP going forward.
And as EQT continues to expand in the Marcellus, Utica and other natural gas shales, it’s building plenty of new pipelines. That will ensure that EQM has a steady dose of new avenues for growth down the road.
Thanks to its super steady nature, EQM doesn’t yield nearly as much of the other MLPs on this list. But don’t be fooled, EQM is a dividend growth powerhouse and has doubled its payout since 2012.
Trump’s Tax Plan MLPs: Alerian MLP (AMLP)
Distribution Yield: 7.8%
For those investors looking at a broad way to play MLPs and their potential, you can’t go wrong with the sector’s main benchmark — the Alerian MLP Infrastructure Index. And the best way to play the benchmark is through most popular MLP exchange-traded fund — the ALPS Alerian MLP ETF (NYSEARCA:AMLP).
The $10.3 billion AMLP tracks the 25 largest MLPs that get their cash flows from the transportation, storage and processing of energy commodities. We’re talking about pipeline and midstream firms. That’s a key distinction, as there are numerous firms in other natural-resource-related industries that have adopted the tax structure.
Top holdings for the MLP ETF include midstream stalwarts like Magellan Midstream Partners, L.P. (NYSE:MMP) and MPLX. AMLP’s focus on the “cream of the crop” produces some pretty steady dividends for investors. Even after a dividend cut earlier this year, the ETF yields a hefty 7.67%.
Even better is how the MLP ETF will deal with Trump’s proposed tax cuts. In order to be MLP-focused, AMLP had to be structured as a C corporation thanks to the rule that open-end funds can’t hold MLPs. Essentially, the fund has to pay taxes on its holdings. With Trump lowering the tax rate for corporations, AMLP will benefit as will its holdings and investors.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
