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Trump's tax cut proposal shines light on MLPs

Wed 26th April, 2017 7:14pm
By Rodrigo Campos and Liz Hampton 
    NEW YORK/HOUSTON, April 26 (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 
    The proposed changes include a cut to the top tax rate on 
pass-through businesses to 15 percent from the current rate of 
up to 36.9 percent. 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. 
    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 
    "If the average rate (for MLP investors) is in the 30s, 
reducing it to 15 percent 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. 
    "They're talking about giving MLPs the same 15 percent 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 
 CLc1 . 
    "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. 
    "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." 
    Even with their above-average dividend yields, MLPs have 
lagged the S&P 500's  .SPX  total return in the last year by 
around 240 basis points.  
    MLP stocks - more specifically, units - are up as a group so 
far this year, with the Alerian MLP ETF  AMLP.P  up 1 percent, 
though they have fallen 2.1 percent since Trump took office - 
even as his administration has been more friendly to sector 
projects like the Keystone XL Pipeline and the Dakota Access 
    The ETF rose 0.8 percent Tuesday as details of the tax 
proposal were reported first by the Wall Street Journal. It was 
the largest gain for the fund in six weeks. 
    Among the best performers in the sector this year are Shell 
Midstream Partners  SHLX.N  and Tallgrass Energy Partners 
 TEP.N , both up by more than 11 percent in 2017, while Plains 
All American Pipeline  PAA.N  and Genesis Energy  GEN.N  are 
down 5 percent and 9 percent year to date, respectively. 
 (Editing by Dan Burns and Matthew Lewis) 
 ((; +1.646.223.6344; Reuters 
Keywords: USA TAX/MLPS
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