Supercharge Your Wealth and Pay (Nearly) No Taxes!

By Travis Johnson, Stock Gumshoe, July 16, 2009

That headline comes from an ad for a new income-focused newsletter that is just launching now … Roger Conrad and Elliott Gue are starting a service that sounds quite familiar — they’re calling it MLP Profits, and it will be focusing, you guessed it, on Master Limited Partnerships. The publisher, KCI, tried to launch something similar a year or two ago with Neil George called The Partnership, but I guess it must not have taken off … try, try again!

I know a lot of my readers like Roger Conrad, and his Canadian Edge newsletter is highly ranked by the folks on the Stock Gumshoe Reviews site, so I thought I’d take a look and see what kind of picks he’s teasing for this MLP-focused newsletter.

If you’re not familiar with MLPs in general, I’ve written about them many times and they exist in any number of industries. The biggest group of them are in the midstream energy space, meaning they process, store, and transport natural gas, refined products, and crude oil, with the most well-known of these MLPs being the big interstate pipeline owners. They can be thought of as somewhat similar to Real Estate Investment Trusts, in that they don’t have to pay corporate taxes because they pass through their earnings to their unitholders, but they carry significant tax advantages for many folks beyond that (it’s a bit complicated, but because of depreciation a lot of the distributions are treated as return of capital, so you don’t owe taxes on them until you sell the units — I’m not a tax expert, and MLPs do require some additional recordkeeping and tax forms, so don’t rely on me for those details).

And MLPs exist in a lot of other industries as well — I even called folks’ attention to one of them, StoneMor Partners, as my Stock Gumshoe Irregulars “Idea of the Month” back in June, and aside from that cemetery owner there are MLPs that focus on horse racing, financial services, shipping, real estate, and fertilizer, among a few others, but those are outliers and oddballs — the vast majority are in the energy business in one way or another.

These vehicles got a bad name shortly after they were introduced in the late 1980s, largely because there were a bunch of them that were somewhat “scammy” and really designed just to be tax shelters, but they are very popular and usually well-respected now, and new rules allow mutual funds and institutional investors to hold meaningful positions in these partnerships as well, so there’s more attention for the sector.

Throw in (as Conrad does) the guess that the baby boomers will be looking for dividend income, or that the Canadian trust sector, a long-time favorite of yield investors, is seemingly losing popularity with their new tax changes for trusts, and there’s the chance that MLPs will gain in popularity, pushing prices higher, as those nearing retirement look for relatively safe, high yield investments.

Conrad claims that they’ll be covering all the MLPs in this newsletter, which would be a bit of a handful but not impossible (there are less than a hundred that I know of) … and he tells us that he’s got a few favorites to recommend right away.

Those are the ones your friendly neighborhood Stock Gumshoe is interested in finding, of course … so let’s see what clues he provides:

“Piping In Your Profits. This MLP owns a top-notch portfolio of extremely stable refined products — pipelines and crude oil terminals. So top-notch, in fact, that the stock is shooting up at more than nine times the rate of the S&P, with gains of more than 20% in the first half of 2009. And that’s on top of a current yield of more than 7%!

“The company’s refined products pipelines carry petroleum products like gasoline and jet fuel for which volumes vary very little, even including during the recent recession. They’re able to offset any decline in volumes there may be with higher tariffs, and they’re seeing even stronger growth in their terminals segment, which has been able to raise fees dramatically on older contracts coming up for renewal. And terminals are generally seeing high demand for ancillary services such as mixing ethanol and other additives to gasoline.

“They have strong growth projects too, including tank facilities, a pipeline between their Texas terminal and a massive refinery, and acquisition of a refined products pipeline in Texas from oil giant ExxonMobil. These should enable management to meet its goal of a 10 percent distribution hike later this year. All of which is a great reason for you to own this company now.”

That sounds like it must be … Sunoco Logistics Partners (SXL)

They did indeed just (eight months ago, that is) buy a refined products pipeline from ExxonMobil (the MagTex pipeline system, in Texas, and stated that it should be immediately accretive to their cash distributions. They were formed to buy Sunoco’s pipelines, but have expanded beyond that with big refined product pipelines primarily from Texas to the Midwest, and in