Energy vs. Energy Infrastructure: 'MLPA' Capitalizing on the Distinction

As energy assets bounce back, income-starved investors may want to revisit master limited partnerships (MLP) and the Global X MLP ETF (MLPA).

MLPA seeks to replicate a benchmark that offers exposure the overall performance of the United States master limited partnerships (MLP) asset class. MLPs have become very popular in recent years for primarily two reasons: (1) required quarterly distributions provide a steady stream of current income, and (2) because they are partnerships, MLPs avoid corporate income taxes at both the federal and state level as the the tax liability is passed through to the individual partners.

MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market. MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, they have historically shown a weaker correlation to energy prices over longer periods as the investment vehicle acts more like an energy toll road, profiting on the volume of oil moving through the pipelines.

By generating at least 90% of income from natural resource-based activities such as transportation and storage, an entity can qualify as an MLP and not be taxed as a corporation. So the IRS treats shareholders of an MLP as partners, making the MLP itself a pass-through entity, which means that taxes are avoided at the corporate level, and investors avoid the double taxation of income.

‘MLPA’ Is Moving Higher

The Global X exchange traded fund is getting a lift from substantial macro tailwinds.

“Energy is quite sensitive to economic activity, so economies on pause due to a global pandemic has significant repercussions for the sector,” says Global X analyst Rohan Reddy. “However, vaccine approvals and initial vaccinations rollouts around the world provided a healthy dose of optimism toward the end of 2020. In the US, the Food & Drug Administration (FDA) approved the Moderna and Pfizer-BioNTech COVID-19 vaccines for emergency use in December. With more vaccine approvals on the horizon globally and increasingly efficient vaccination programs, an end date to the COVID-19 ordeal is gradually coming into sight.”

MLPA invests in MLPs and other energy infrastructure companies that may result in above-average yields.

“Energy also benefitted from some clarity on midstream contracts in Q4 as bankruptcies were settled. Bankruptcies spiked after the oil price collapse last March, but the pace slowed considerably throughout 2020 as fundamentals improved,” adds Reddy. “Midstream companies have a vested interest in recovering as much as they can from Exploration & Production (E&P)’s during the bankruptcy process. Bankruptcy court is fraught with uncertainty, but these settlements indicate distressed upstream E&Ps are willing to work with their midstream counterparts in this environment.”

MLPA 3 Year Total Return

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