MLPs are an innovative investment commonly connected with the oil industry. This article reviews the basics about MLPs.
What is an MLP?
MLP stands for “master limited partnership.” It is a limited partnership that is publicly traded on a securities exchange. It ties the benefits of a limited partnership with the publicly traded securities’ liquidity. Master limited partnerships are limited by U.S. federal law to businesses using our natural resources, such as natural gas extraction, transportation and petroleum. To be able to pass for MLP status, a partnership must be able to generate at least 90% of its income from what the IRS considers as “qualifying” sources. MLPs are required to give distributions to their own unit holders on a quarterly basis. This includes limited partners and general partners.
What is the correlation between MLPs and the oil industry?
U.S. companies that own energy infrastructures are called energy MLPs. This includes natural gas, pipelines, oil, storage, gasoline, processing plants and terminals. Since MLPs need to derive 90% of their revenues from natural resources, they often resort to venturing into the oil business. This is because the gains in the oil industry have been so much higher compared with those in other industries.
Midstream MLPs are those primarily involved in the collection, storage and transportation of oil and gas. They earn their money based solely on the storage and transportation of fuels.
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