Energy pipeline stocks may be poised for gains, but it has nothing to do with oil or gas prices

Oil and gas transportation/storage stocks may be poised for a rise, but not because of what could happen to oil and gas prices. It’s for tax and dividend reasons.
These companies, largely oil and gas pipeline owners, are often structured as master limited partnerships (MLPs) and trade as stocks. The distributions to shareholders from these MLPs are high, ranging from about 5% to 9%.
And unlike standard dividends, they aren’t subject to federal taxes. Rather they are counted as return of capital. To be sure, that does lower your cost basis, which increases your capital gains tax if you sell the MLP. But if you hold it for a long time, your distributions will easily make up for the capital gains tax.
The reason that oil and gas prices have little impact on the pipeline companies is that their services are necessary regardless of oil and gas price levels. Energy producers have to get their product shipped. Another benefit for the MLPs: they generally have 15-20 year contracts with the energy producers.
US President Donald Trump’s energy policy also should help MLPs by allowing them to build more pipelines and to ship natural gas overseas.
Bill Gross is a believer
One famous bull on MLPs is retired investor Bill Gross, who ran Pimco Total Return, the world’s biggest mutual fund in the 1990s.
“For nearly two years I have been recommending MLP pipelines as an attractive energy play with high yields and upside price potential,” Gross wrote in a recent commentary.
The Alerian MLP ETF, which includes the major pipeline companies, has climbed 29% over the last two years. That far exceeds the 4% gain for the Energy Select Sector SPDR Fund (NYSE: XLE), which includes Exxon and Chevron. Also, the MLP fund has a distribution yield of 7.7%, much higher than the energy fund’s 3.4% yield.
Gross thinks the rally can continue. Among the MLPs he recommends, in alphabetical order, are Enterprise Products Partners (NYSE: EPD), Energy Transfer (NYSE: ET), Hess Midstream (NYSE: HESM), MPLX (NYSE: MPLX) and Plains All American Pipeline (NASDAQ: PAA).
The author owns shares of Enterprise Products Partners.