Ian Wyatt is selling his High-Yield Wealth newsletter by promising to help you get your first “gas rebate check” that can offset your high fuel expenses.
Which sounds appealing, right? No one likes to fill up at the gas station, and people go gaga even for simple store card rebate programs that give you five or ten cents off per gallon… so a much larger “rebate” sounds intuitively appealing. Here’s how the ad gets us excited:
“Here’s How to Collect Your First All-American Gas Rebate Check on January 18th, 2013…
“While the rest of the country is getting gouged at the pump… a handful of regular Americans are using a little-known gasoline rebate program to completely fund their fuel expenses…
“This year, more than $131 million will be paid out in All-American gas rebates.
“And the best part? These checks are mandated by the U.S. Government… meaning you’re guaranteed to collect!
“According to The Wall Street Journal’s MarketWatch… ‘Few people know about [gas rebate programs]… but this is a great income generator.’
“In fact, you could be eligible to collect your first payment of up to $310, within the next 30 days!”
Does that sound at all familiar? Yes, the “gas rebate check” pitch has been used by investment newsletters before — though it’s been a while. The Oxford Club folks teased Canadian Royalty Trusts as a way to earn “gas rebates” back in 2008 and 2009, and we know that’s not what Wyatt is pitching here … if only because there aren’t really any Canadian Trusts of that flavor anymore, they got snuffed out with the Canadian tax law changes that hit a couple years ago.
So you can probably guess what Wyatt is pitching, but let’s not spoil the surprise just yet … a bit more from the ad first:
“Why You’ve Never Heard of a Gas Rebate Check
“You won’t hear about it from the guy at the filling station… or even the CEO of Exxon…
“Chances are they won’t be able to tell you anything about it.
“And while it’s among the single easiest ways to earn extra income to pay for gasoline — (or anything else for that matter) — I’d be willing to bet that not one in 1,000 people even know this type of program exists. It’s amazing that it’s remained under the radar for so long….
“… by signing up for these All-American gas rebates, it’s very likely that you’ll earn you enough extra cash to pay off your gas station credit cards and cover your gas expenditures.
“What’s more, after a few years on the plan, you could be taking in even larger payments… much larger.
“New York Times reports: ‘Most large “gas rebate programs” have raised distributions for 20 years or more.’
“Now you might be surprised to learn that the Gas Rebate programs are nothing new.
“The truth is, in-the-know Americans have been receiving these ever-increasing payments since the mid-80’s!”
OK, we’ll take you out of your misery — yes, Wyatt, like so many newsletter pundits before him, is teasing Master Limited Partnerships (MLPs), which are sort of similar to the Canadian Trusts of old. MLPs are largely in the energy infrastructure business, owning pipelines and processing plants and the like, and they distribute their cash flow to unitholders (analogous to shareholders, only MLP shares aren’t technically stock so the terminology is different). They usually have both high yields and tax advantages for many shareholders, since the cash they distribute is, thanks to huge depreciation or depletion allowances for these capita-intensive businesses, usually far in excess of earnings (so instead of generating a tax bill, it just lowers your cost basis — you push that tax liability off until you sell the units).
We’ve written about MLPs a jillion times, it seems — there are dozens of them, and we had a wave of new ones introduced to the yield-starved market over the past two or three years, so interest is quite high. I guess it’s possible that one in a thousand people hasn’t heard of them, but certainly most active investors at least know what they are … and most income-focused investors find them at least tempting.
MLPs are one of those asset classes that require some education, since they have unique tax reporting and record-keeping requirements … and though there are ETFs and closed-end funds that give you exposure to MLPs and their average yield of about 6%, those funds end up both simplifying your recordkeeping and filing obligations and getting rid of most or all of the tax benefit of investing in MLPs. There are some MLPs that actually pump oil and gas out of the ground and have direct exposure to commodity prices, and a handful of these publicly traded partnerships that aren’t connected to the energy business at all (there are oddball MLPs in cemeteries, asset management and agriculture, to name a few) … but most of them are toll businesses, owning pipelines and charging companies to move oil, gas and refined products around the country.
And most of them pay quarterly distributions, so if you’re looking specifically for that “rebate” aspect then consider that the average quarterly payout if you bought a basket of MLPs now would be something like 1.5% (6% a year). So for a payment of $310 in the next payment period, depending on the MLP or group of MLPs you purchase, you’d likely be investing capital of roughly $20,000. There’s nothing wrong with that, it’s still a respectable income yield particularly in this low interest rate environment, but it’s not exactly the same as signing up for a free frequent buyer card from your grocery store or something like that and getting ten cents off per gallon.
As an aside, the average American consumes something in the neighborhood of one gallon of gas per day, though that includes non-drivers, so gasoline probably costs the average person something between $1,000-$2,000/year, depending on how much they drive and what gas prices are. Not that you’re necessarily in that range, the average would come from an extremely large range of possibilities … I know people who don’t own cars and folks who drive 50,000 miles a year.
But that big picture stuff is something we’ve looked at many times before, and I know almost all Gumshoe readers are quite familiar with MLPs … if you’re looking for a specific idea, let’s figure out which publicly traded partnership Wyatt is teasing. Here are some clues:
“Collect Big, Fat Checks Thanks to the Government
“There’s one under-the-radar company that is legally obligated to siphon off the majority of its cash flow and pass it on everyday citizens.
“In 2012, it distributed over $131 million to just a few thousand check recipients…
“But why are these checks so big?
“It’s because this company makes loads of money from the most profitable stage of the gas-producing process. And the government requires that any extra profits go right into the “Gas Rebate” program…
“Here’s how it works…
“This company hauls in millions refining oil into fuels including gasoline, diesel, and jetfuel….
“it’s feedstock of oil comes from friendly, North American markets including Texas, North Dakota, and Canada — meaning it will continue to refine oil and generate cash without any supply disruptions from the Middle East.
“Gasoline only accounts for about 1/3 of its revenue….
“oil is used in thousands of products… from household cleaners to ladies’ make-up.
“And this company refines more than 1,500 of them — making it the most diverse producer of crude oil products in the country… including: petroleum jelly, creams, tonics, lotions, lamp oil, chewing gum base, makeup, car wax, and aerosol products….
“… the next check is scheduled to be paid out in the next 30 days…
“But in order to collect — you must be enrolled in the Gas Rebate program by January 18, 2013.”
And according to the machinations of the Mighty, Mighty Thinkolator, this one is … Calumet Specialty Products Partners (CLMT)
Which will probably go ex-dividend sometime in the next week or so for the current quarterly payout. And which did distribute over $131 million to unitholders in 2012. And which is a US refiner that uses both WTI oil and the even cheaper Canadian and Bakken crude as feedstocks. They do, as you can guess from the name, also have a relatively large business in specialty refining — the stuff other than gasoline. Gasoline is roughly a third of production, if you don’t include diesel, and the specialty products like asphalt, solvents, etc. are close to half of production. They hedge away some of their commodity price risk, so they have been quite stable, and they run eight different production facilities and refineries, as well as a handful of terminals and two blending/packaging facilities for their branded products (including something called Royal Purple).
The distribution has just crested the level it had hit in 2007 before the crash in oil prices and in the markets, the 2008-2009 crash brought the distribution down and it stayed flat for several quarters, but in the last couple years they’ve moved to increasing the payout each quarter — so the current yield is exactly 8%, and it is likely but not guaranteed to grow steadily from here. Incidentally, that $310 payout was teased in the ad, and that’s exactly what your payout would have been for the last quarter if you owned 500 shares.
The only other “pure play” refiner I’m aware of that’s also a MLP is Northern Tier Energy (NTI), which is likely to be more profitable in the short term but significantly less steady — NTI owns only one refiner, and while it’s a supremely profitable one right now because it gets almost exclusively cheap mid-continent oil it is a “all your eggs in one facility” play and their payout for the coming year is unknown (it will probably be higher than 8%, but you can’t just annualize the one distribution they’ve made to date and assume a 20%+ yield, in part because that payout was prorated). It’s worth noting, however, that all refiners are hot businesses right now, and hot stocks for the most part — and some of them that aren’t MLPs do still have large dividend payments (HollyFrontier, for example — ticker HFC — currently yields over 6% thanks to recurring special dividends).
So … interested in a relatively high-yield MLP that’s big into specialty refining? Think an 8% yield fairly compensates you for owning Calumet Partners? Let us know your opinion by sharing a comment below.