Trump Tax Cut Proposal Shines Light On MLPs

Trump Tax Cut Proposal Shines Light On MLPs

The proposed changes include a cut to the top tax rate on pass-through business to 15% from 36.9%.

New York/Houston (Reuters) – The Trump administration's proposal to slash tax rates on so-called pass-through businesses would deliver a windfall to investors in master limited partnerships and could offer a much-needed lift to this niche segment of the energy market.

The tax plan outline released on Wednesday by U.S. President Donald Trump would sharply slash business taxes and discount the rate on overseas corporate profits brought back into the United States.

The proposed changes include a cut to the top tax rate on pass-through businesses to 15% from the current rate of up to 36.9%. Pass-throughs get that name because taxes are not paid by the business itself but pass through to their owners' individual taxes, at that rate.

MLPs Would Benefit

The change would largely benefit owners of private businesses, but U.S. stock market investors holding shares of master limited partnerships, or MLPs, would receive the same treatment. MLPs build the pipelines and storage tanks, and are a common corporate structure in the oil and gas infrastructure sector.

"If the average rate [for MLP investors] is in the 30s, reducing it to 15% would be tremendously attractive," Robert Willens, president of tax and accounting advisory firm Robert Willens LLC, said on Wednesday.

He said if the cuts come through, they would make MLPs "the most attractive investment from a tax point of view."

Mike Bresson, a tax partner with the law firm Baker Botts in Houston said Trump's proposed change would enhance an already-superior tax structure enjoyed by MLPs.


MLPs Over Corporations

"They're talking about giving MLPs the same 15% tax rate that corporations get, so that would actually expand the benefits of MLPs over corporations," Bresson said. "The devil is in the details, and we haven’t seen them."

MLPs have broadly underperformed the wider stock market over the past several years, largely due to the weakness in oil prices. The energy sector was pummeled as crude prices tumbled from above $100 per barrel in mid-2014 to below $30 early last year. They only recently stabilized at around $50 for U.S. oil.

"There has been a gradual improvement in MLPs now that energy prices have stabilized. It's still a decent place to invest even without the tax cut," said Bryant Evans, portfolio manager at Cozad Asset Management in Champaign, Illinois.

'Almost Immediate Bounce'

"There should be an almost immediate bounce [in price] once the proposal is solid. It should create more demand for MLP stock in general. But beyond an immediate bounce, it all goes back to how their businesses are doing,” he added.

Even with their above-average dividend yields, MLPs have lagged the S&P 500's total return in the last year by about 240 basis points.

MLP stocks—more specifically, units—are up as a group so far this year, with the $10 billion Alerian MLP ETF (AMLP) up 2.78%, though they have fallen 2.1% since Trump took office—even as his administration has been friendlier to sector projects like the Keystone XL Pipeline and the Dakota Access Pipeline.

Among the best performers in the sector this year are Shell Midstream Partners and Tallgrass Energy Partners, both up by more than 11% in 2017, while Plains All American Pipeline and Genesis Energy are down 5% and 9% year-to-date, respectively.