The surge in energy prices has caught the attention of legendary investor Bill Gross, who recently expressed his love for Master Limited Partnership (MLP) pipelines. In a social media post, Gross highlighted the impressive performance of MLPs over the past 12 months, noting their double-digit growth. MLPs offer investors a unique opportunity to capitalize on the exploration, transport, and processing of oil and gas. With the rise in energy prices, MLPs have become an attractive income-oriented play, especially as West Texas Intermediate crude futures have surged by nearly 20% in 2024.
While oil remains a hot commodity in the current market, there is growing interest in natural gas as the next frontier for investors eyeing the energy sector. Despite a 26% decline in natural gas futures in 2024, analysts see better growth prospects in this space. Stephen Ellis, an energy and utilities strategist at Morningstar, believes that natural gas has a more attractive outlook compared to oil, particularly for midstream investments. With demand for natural gas liquid exports rising in Asia, there is significant potential for growth in the natural gas market.
For investors looking to capitalize on the potential of natural gas and energy infrastructure, there are several key players to consider. Energy Transfer, Enterprise Products Partners, and Targa Resources have emerged as top picks in the energy sector, offering attractive dividend yields and growth opportunities. Energy Transfer and Enterprise Products Partners, both partnerships, boast yields of 8% and 7.1%, respectively. Meanwhile, Targa Resources, a gas distributor, operates as a C corporation with a yield of 1.8%. Analysts covering these companies are bullish on their prospects, with consensus price targets indicating significant upside potential.
One of the key factors driving the success of MLPs is their unique business structure and tax benefits. Unlike C corporations, which are subject to corporate income taxes, MLPs operate as partnerships, allowing them to avoid double taxation. General partners oversee the day-to-day operations of the MLP, while limited partners provide capital and receive income distributions. This tax-efficient structure enables MLPs to offer appealing yields to investors, making them a popular choice in the energy market.
While MLPs offer attractive income opportunities, they also come with tax complexities that investors need to be aware of. Partnerships issue Schedule K-1 forms to investors, detailing their share of income, which can delay the filing of individual tax returns. Investors holding MLPs in tax-deferred accounts, such as IRAs, may face additional tax liabilities, known as unrelated business taxable income. It is important for investors to carefully consider the tax implications of holding MLPs in different types of accounts and to ensure timely filing of tax returns to avoid penalties.
MLP pipelines present a compelling investment opportunity for income-oriented investors seeking exposure to the energy sector. With the rise in energy prices and growing interest in natural gas, MLPs offer attractive dividend yields and growth potential. However, investors should be mindful of the tax complexities associated with MLP investments and carefully consider the implications of holding MLPs in different types of accounts. By staying informed and making strategic investment decisions, investors can navigate the ups and downs of the energy market with confidence.