As Robert W. Baird & Co.'s Ethan Bellamy explains, master limited partnerships are yield-producing investments that can bring remarkable returns to smart investors and provide short-term buy-sell profits. In this interview with The Energy Report, Bellamy discusses a fistful of partnerships worth an investor's dollars.
Ethan Bellamy specializes in the analysis of master limited partnerships at Robert W. Baird & Co. Previously, he was director of research for the Lehman Brothers MLP Opportunity Fund, where he was responsible for fundamental analysis and due diligence in public, PIPE and pre-IPO investments in natural resources. He also covered MLPs at Stifel Nicolaus. He holds a master’s degree from the University of Colorado at Boulder, and a bachelor’s degree from Clemson University.
The Energy Report: Ethan, your firm covers a lucrative space in the natural resources sector, master limited partnerships (MLPs). Would you briefly describe this investment vehicle?
Ethan Bellamy: Master limited partnerships are a subset of publicly traded partnerships that have been around since the tax reform of the late 1980s. They serve businesses that extract and transport energy in the United States. They also may generate qualifying income sources in rents and dividends.
TER: How do MLPs differ from other types of partnerships?
EB: MLPs are publicly traded. They get the liquidity benefits of publicly traded securities, coupled with the tax efficiencies and merits of a partnership. The tax structure eliminates the double taxation of dividends. There is no layer of taxation at the entity level, and the tax only occurs at the limited partner level. It is sometimes misconstrued that MLPs are tax-free. In fact, they are not. They are taxed at the unit holder level. But they have a net present value pick-up that one does not find in regular investments.
TER: Why are most MLPs in energy and real estate? Why isn't the form used more universally?
EB: In the late 1980s, Winchell's Donuts and the New York Knicks and a bunch of non-energy businesses converted into the MLP structure to make their businesses more tax-efficient and investable. Congress elected to wall off the MLP structure to a subset of extractive resources to prevent the erosion of the corporate tax space. The MLP space was subsequently expanded to include biofuels and logistics. There is a move afoot to expand the sector to include renewable energy sources.
TER: Is that a good move?
EB: Renewables deserve a level playing field. I would welcome any cash-flowing businesses with good yield characteristics that can diversify the energy sector.