“America’s Oil Pension: Government A.O.P. Retirement Plan”

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This piece deciphered the original “A.O.P.” teaser form 2007, the ad was revised and is now running again in 2012, we looked at the new version here.

This one on the so-called American Oil Pension (A.O.P) has been making the rounds quite a bit lately, with lots of different variations over the past couple weeks — it’s from Stansberry & Associates and advertises their “Oil Report,” which is yet another subscription newsletter.

It also gave me a headache for a while, but that’s neither here nor there.

Quite a bit of space in the ad is committed to extolling the virtue of the A.O.P., and explaining how many people got terribly wealthy from this investment, with hundreds of thousands of dollars in annual payouts to some lucky investors.

And the big tease is that on May 15, the biggest payout from the AOP’s yet will make everybody rich (or everyone who subscribes, at least).

The special report you get when you subscribe is entitled: “A.O.P. Will Pay for Your Retirement – No Matter What the Price of Oil”

Their acronym, AOP, means “American Oil Pension,” and it doesn’t mean anything to those of us who don’t work for Stansberry. It’s just a made up term to make it seem more mysterious and exciting.

Lots of stuff about this makes these seem like secretive, or well-hidden companies:

Goldman Sachs, the Wall Street Journal, and MSN Money are all quoted as saying this is an undiscovered or under-appreciated investment.

And more officious sounding stuff follows, including:

“Thanks to Sections 851-855 of the U.S. Internal Revenue Code of 1986, A.O.P. businesses pay no corporate taxes on the Federal level.”

(which makes them about as unique and mysterious as Business Development Companies, Partnerships, or Real Estate Investment Trusts — woohoo!)

The other big sell for these companies is that they make money “regardless of where the market goes.” Sounds good, eh?

Well, what they’re really talking about are MLPs — Master Limited Partnerships. And they really have been around for 25+ years, without getting much attention, at least until the last three or four years. They tend to be in boring businesses that are asset-heavy and have lots of depreciation, and most of them are involved with distribution of oil, natural gas, or refined petroleum products. The most well known ones own oil and natural gas pipelines, but there are some that distribute propane, or actually do some oil exploration, etc.

And while the payouts might be a bit larger than usual these days because the price of oil is high and the infrastructure that these MLPs own is being heavily used, as far as I know there’s nothing magic about May 15 or any other artificial deadlines you’ve seen broadcast in these emails. That’s probably just the ex-dividend day for the quarterly dividend of one or several of them. Most of these MLPs have a pretty strong record of consistent increases in their payouts, of not absolutely every year than at least quite frequently.

And most of the teased companies have an average or below-average yield for this sector, along the lines of 5-6% … so if you want a several-hundred-thousand-dollar payout on May 15, you’d better be prepared to put in several million dollars first. Or start compounding your interest on a smaller investment and wait for May 15, 2070. The “huge payouts” language in the ad is a bit misleading, I think.

MLP’s in general have had 17% annualized returns over the past ten years or so … which is great, but a fair amount of that has been capital appreciation, which means in part that the yields are not nearly as high as they were when I first looked into these companies four or five years ago. Back then, I recall seeing a lot of 8-9% yields … today, it’s more like 5-6%, (this might also be a problem with my memory). This is not unlike the yield deterioration we’ve seen from most REITs.

So all the people who held these partnership shares for years are indeed now getting garbanzo payouts relative to their initial investments … you? Not so much. Wait a couple decades.

But, they did say that they had picked out the best four “AOPs” to invest in … so of the fifty or so that exist, can the Gumshoe figger out which four are Stansberry’s favorites?

Let’s see.

In the ad’s words: “What I found is that there are FOUR A.O.P. businesses that stand head and shoulders above the rest—they regularly send out the biggest paychecks… and have superior streams of revenue.”

He calls them A.O.P. companies 1-4, so here are the basics about each one, and the solution to the puzzles:

  • “A.O.P.” Company #1: An Oaklahoma based business that transports, stores, and distributes refined petroleum products through 8,500 miles of pipeline.”

This one looked to have two potential candidates on first glance — Enbridge Energy Partners or Magellan Midstream Partners, but I’m sure it’s Magellan.

Enbridge is a little squirrely, since the parent company is based in Oklahoma but the MLP — which is what has the big yield — is technically headquartered in Houston. They do have about 8,500 miles of pipeline, but it’s not primarily for refined products (more crude oil and natural gas). You can look into it and see if you prefer Enbridge Energy Partners LP (EEP) or Enbridge Energy Management (EEM), or the lower-yield management company (that also has other interests), Enbridge, Inc. (ENB). Here’s a diagram and explanation of the management structure if you’re interested.

So this first favorite “AOP” is really Magellan Midstream Partners (MMP) – it has had performance that closely matches the clues given here, and it did IPO back in 2001 so that date makes sense. The distribution dates also match what are likely to be the dividend dates for the next quarter, though I haven’t seen those officially announced (those dates are exactly three months from this quarter’s announced dates).

They also do transport specifically refined products through their 8,500 mile pipeline system. They used to be called Williams Energy Partners, by the way, but changed their name back in 2003. The yield is on the small side because they’re really growth-focused, but you still get a bit over 5% … not bad, though historically pretty low for the sector and lower than a couple of the others here.

  • “A.O.P.” Company #2: Transports and stores refined products crude oil in 12 states through 5,522 miles of refined and crude oil pipelines. This business has issued 15 distribution increases over the past five years and has watched its stock rise by 228% during that time. In 2006, they paid out over $145 million in distribution checks, which is more than twice the amount they paid out in the previous year.”

My first guess as to the best fit for this was Colonial Pipeline Co., which owns the Gulf-to-East Coast pipeline that sat idle and after Katrina and kept my home market of D.C. thirsting for gas.

But it’s not publicly traded … so there must be something else. If you’re interested, Colonial actually reports that they have 5,519 miles of pipeline across those 12 states, and they do transport both refined product and crude oil through the pipeline (in batches, which I didn’t know they could do without mechanical separators, but apparently they can).

But they’re owned by a group of other private companies and partnerships and don’t have any MLP connections that I’m aware of. So … bummer. This one stuck in my craw and took some time.

Because the next company to come up in the thinkolator 4000 was El Paso (EP), which is a pipeline company but not a MLP-structured one, mostly because they paid out exactly $145 million in dividends last year … but they’re not a match either. Arg.

Thankfully a reader came in to help break my logjam on this one — he suggested that it’s Sunoco Logistics Partners (SXL), and, thankfully, he’s right: The 5,522 is the sum of their western and eastern pipelines, at 3,635 and 1,747 miles, respectively. And they do “transport, terminal, and store refined products and crude oil in 12 states.”

So onward and upward!

  • “A.O.P.” Company #3: Owns the U.S. portion of the world’s longest liquid petroleum pipeline that transports oil from Alberta’s oil sands to key U.S. refinery markets.”

This one is Enbridge Energy Partners (EEP), which I noted some of the specifics of above for the Magellan one. They do indeed own that US portion of the “longest liquid petroleum pipeline” from Western Canada to the US.

And last, but not least …

  • “A.O.P. Company #4: One of the largest independent refined petroleum products pipeline systems in the U.S. in terms of volumes delivered, with approximately 5,400 miles of pipeline. Owns and operates one of the largest independent refined petroleum pipeline systems in the U.S. in terms of volume. They recently issued their 80th quarterly cash distribution increase and should continue to pay out 99% of its profits for at least the next 10 years.”

This one is Buckeye Partners (BPL) — the “approximately 5,400″ and the “One of the largest independent bla bla bla” quotes are direct from their homepage.

All of these are based on very skimpy clues, but since they match the exact numbers given (like the pipeline mileage) and exact quotes from company websites, I’m pretty confident in all of them. As noted with Colonial, there is another company that has exactly 5,219 miles of pipeline … but I doubt that there’s another one out there that has exactly 5,522 (especially when we’re talking about a limited universe of only about 50 companies).

So are any of those good investments?

Oops, I’ve run out of space!

Just kidding. I actually have no idea whether this is a good space to buy right now.

I owned some shares of the various Kinder Morgan partnerships years ago, and they are a nice piece to have in some portfolios. It’s true that the business is remarkably steady if the pipeline is situated to feed the right areas — they don’t care how much the oil costs, they just get a tariff on the volume that uses their pipes, so they shouldn’t suffer if oil prices fall (at least, not too badly).

My primary concern on all of these has been that they can be a pain in the butt, tax-wise (different forms), and that they are very much yield-focused so they compete primarily with bonds and high dividend stocks like REITs … all of which seem crazily priced to me at the moment. My personal sense, and it has not made me any money in the last couple years as I sold my REITs too early, is that the prices will have to come down to make the yields more attractive.

And if you’ve got the inclination to sift through complex corporate relationships, they all have tight and important relationships with other companies — some public, some not — that actually manage the pipeline, or handle corporate responsibilities, or are the major customer of the pipeline, so in most cases there are complicated webs of inter-ownership between at least two related firms. Many, like Enbridge, have even two different partnerships that are essentially two different ways of owning the same thing … just like Kinder Morgan had two partnerships, one that got cash dividends and one that got share dividends. Probably it all works out fine in the end, but I’m always nervous when I need a diagram to understand the company structure.

That’s just me, of course. And as I said, my understanding of this business hasn’t made me any money for years … and it might just be plain wrong. I didn’t see any particular red flags for these companies, or any reason to think they’re particularly stronger than the other 40+ MLPs out there, but if you have something to share on these or found a chink in the Gumshoe’s reasoning, please go right ahead and share it.

And just a quick FYI — I think the best place to look for info on income securities like these is QuantumOnline.com, they have some great compilations of data on preferrred stocks, MLPs, REITs, all that good stuff. You have to register, but it’s free.

Happy investing.

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25 Responses to “America’s Oil Pension: Government A.O.P. Retirement Plan”


  1. They May 15th date might corespond to changes that are being made in the canadian income trust world. The canadian government is thinking of changing the income trust and we have seen since this was mentioned in November a huge rise in companies such as DPM, EPD, TNK, in comparison to normal dividend payments. If you are interested look at FMO it is a fund of these companies.

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  2. I’ve been invested in MLP’s for the past seven years and they have all been been good to fantastic (except for the one that was tied into Enron which blew up completely). They have not only appreciated handsomely, they pay fairly hefty returns, AND these returns are largely (typically 90%) tax deferred meaning no tax until you sell, at which point the distributions reduce your cost basis so the tax rate becomes capital gains vs ordinary income on those distributions which is a double benfit for most,(time value of delaying tax payments and at reduced rates when you pay).

    Historically, from my holdings, PAA and OKS along with MMP have significantly outperformed BPL and EEP which they hype (BPL and EEP have not even kept pace with KMP which is the leader in terms of market cap, but underperforms some of the smaller MLP’s that presumably are growing faster to outperform)!

    However, if you don’t have a CPA, you’ll need one!

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  3. I thought I was at least computer literate enough to find a way to contact the stock gumshoe by email, but alas, I can’t figure it out.

    If I have a promo letter that needs detective work, how do I send it to you guys?

    Thanks
    Bob

    Like(0)

  4. We hold small positions in several of the Canadian income trusts, including AAV(13.1%), CNE(15.4%), PGH(15.0%) and PVX(11.5%). (The numbers are the annual dividend yield, reported by MSN Money.) They pay out dividends on the 15th of every month.
    Last October, the Canadian Finance Minister, James Flaherty, put forth a proposal to end the preferential tax status of these trusts; the immediate result was a rather large hit on the share price of Canadian income trusts. I haven’t heard anything about actually enacting Mr. Flaherty’s proposals, but in the mean time the dividend yield percentages have persuaded us to maintain our positions.
    DuhBruzer

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  5. Hi Anonymous — the most complete list I know of for MLPs (which is the standard term — AOP is just a made-up name) is run by QuantumOnline.com … you have to register, but it’s free, and then you can access their whole list of Master Limited Partnerships (and if you’re interested in this kind of thing, you may like their listings for preferred stocks, convertibles, etc., too). Once you’ve registered with them, just click on “Stock Lists” and “Master Limited Partnerships”

    Best,
    SG

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  6. Thanks for info, I was starting to search out the top 4 AOP’s. You saved me a bunch of time and trouble.
    Thanks for your research,, Lee

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  7. One of the comments on here was that I would need a CPA to keep track of these AOP’s. What would be the drawback of owning some of these in a regular IRA through a brokerage company?

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  8. Stansbiury is circulating their video again. Was going nuts trying to figure out what the heck an EOP was. As a tax preparer you are right. MLP are a pain in the butt and you really need to keep close track of the return of capital and reduction in basis. My software keeps track of it for clients as long as they don’t come to me after owning one of these for a few years or leave me for another tax preparer!

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  9. THANKS FOR THE INFO I WAS RESEARCHING THE CO’S U LISTED I FOUND ALL XCEPT THE CNE ANY THING I SHOULD LOOK 4 TO PULL IT UP?

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  10. Peggy, these trade the same as common stock — it’s not really a plan or a fund, so minimum investment doesn’t apply. Do your research on MLPs (the real name) before you decide whether or not to invest in one.

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  11. CNE (Canetic) was acquired by a competitor last fall, so you can’t buy them anymore. I haven’t reviewed the ad to see if they replaced it with a new name, but it’s always worth browsing at QuantumOnline.com if you’re interested in finding MLPs or Royalty Trusts or other high dividend stocks.

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  12. Dan, you can own MLP’s in an IRA account, but you can still be taxed for “unrelated business income.” However, you can send your K-1 to your brokerage company and they’ll determine if you need to pay taxes. The CPA is probably for a regular brokerage account. I owned KMP in a regular brokerage account until I realized that tax reporting for the Schedule K-1 is killer. I ended up paying a tax preparer $300 to work through all the additional tax forms!

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  13. Canetic (CNE.UN) was bought out by Penn West income trust (PWT.UN).

    The combination was later acquired by a Private equity fund from Abu Dhabi.

    Did Mr Flaherty succeed in increasing the Canadian Government’s tax revenues from those trusts?????….NOT!!!!

    Like(0)

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