A new position!

Investment Analysis Clubs Saul’s Investing Discussions
#1

A new position

Two weeks ago I established a small, my smallest, actual position in a very atypical position for me. It’s a company called Antero Midstream (AM), and it builds infrastructure for moving natural gas and wastewater from fracking for a company called Antero Resources (AR). It’s quite profitable and raises dividends every quarter. I found out about it by accident when it was recommended by a Zack’s service that I subscribe to but rarely pay attention to. My reason for paying attention was that I thought that with the change in Administration its prospects have probably materially improved and I might as well ride the wave.

The Zack’s service gave almost no information about the company so I searched on Seeking Alpha and found an article about it. It was seven months old but still full of information. Here’s what I gleaned from it:

Antero Midstream is a midstream MLP (Master Limited Partnership) which had a late 2014 IPO, and a potentially bright future. While the company’s partner, Antero Resources doesn’t have quite the global clout that Royal Dutch Shell has (Shell Midstream’s sponsor), AR has quickly risen to being one of the most dominant players within the domestically-produced onshore energy market. It has dedicated itself fully to its new offshoot, putting in place a twenty-year commitment with AM that makes AM the sole provider of gathering and compression services on AR’s current and future acreage (besides acreage previously committed to third parties). As a result, AM has exclusive rights to serve as a distributor on 435,000 acres at the end of 2015 (along with serving other operators who own nearby acreage).
It is important to realize just how reliant AM is on AR. For example, 97% of 2014 revenue and 99% of 2015 revenue came from AR. Third party revenue is basically non-existent.

However, this relationship does go both ways. AR is a large shareholder of AM (roughly 74% of the diluted share count). As a result, AR does have a vested interest in AM shares doing well. Once the dividends reach a certain level, the general partner gets 50% of the excess, which works two ways: it gives the general partner motivation to pay out dividends to the stockholders, but stockholders get less of the dividends.

For the last seven quarters

EPS has gone


2015: 18  13  23  27
2016: 24  27  37

Adjusted EBITDA has gone


2015: 60  65  72  83
2016: 80  88  111

And Dividends have gone


2015: 18.0  19.0  20.5  22.0
2016: 23.5  25.0  26.5  28.0

I took my little position at $33.25. I am well aware that this is out of my area of expertise, but there it is. If any of you know anything more about MLP’s or this one in particular, I’d love to hear it.

Oh, and they just raised guidance for 2017:
• Distribution growth guidance is 28% to 30% yoy
• Targeting 28% to 30% compound annual distribution growth through 2020

Saul

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#2

I am well aware that this is out of my area of expertise, but there it is. If any of you know anything more about MLP’s or this one in particular, I’d love to hear it.

Hi Saul–

Welcome to my world. The world of growing income and tax sheltering due to tax deferment. I’ve been in MLP’s for over 12 years and they have been the backbone of my portfolio and the exponential growth that I have achieved so far.

I have an appointment to go to, but I will discuss further this afternoon

Stay tuned
b&w

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#3

Does it provide 1099div or K-1 for tax returns?

#4

Hi Saul,

Last year I studied MLP’s a bit and held KMI for awhile. This is not a plug but I was very impressed with the writings of Nelson at Valuentum. In particular, he perfectly predicted the behavior of KMI over the past 2 years and has written extensively about MLP’s. I’ll go and check if he’s said anything about AR.

#5

Antero Midstream is a midstream MLP (Master Limited Partnership)…

Just a heads up for those who like to keep tax reporting simple… Assuming AM is required to report K-1’s, I’d stay far away. The amount of support to individual taxpayers varies firm to firm, so unless you already use a tax accountant to file your U.S. taxes, you may be into quite an adventure.

I recall one MLP experience particularly that had K-1 income reported in 18 different states, and it was my responsibility to determine if and what my personal tax liability was in each (as if the Fed filing wasn’t ominous enough).

As a result I will not knowingly touch an investment that has K-1 reporting, no matter how attractive its return may be. That’s just me. YMMV.

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#6

I’ll go and check if he’s said anything about AR.

Thanks Joe, and if you find something, if you could supply a link that would be great.

#7

Welcome to my world. The world of growing income and tax sheltering due to tax deferment. I’ve been in MLP’s for over 12 years and they have been the backbone of my portfolio and the exponential growth that I have achieved so far…I will discuss further this afternoon

thanks B&W, any information would be appreciated. I was buying AM actually as a growth vehicle, by the way, rather than for the dividends, and considered the growing dividends as one of the things that would make the stock price rise, and the actual dividends I would receive would be just an extra benefit.

Saul

#8

Just a heads up for those who like to keep tax reporting simple… Assuming AM is required to report K-1’s, I’d stay far away.

Or buy it in an IRA.

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#9

MLP’s have a different tax treatment. In a tax deferred account there is a penalty for too large a position (as I recall something like $1500 in dividends/year). Additionally the dividends are tax deferred. Make sure you are aware of the special tax treatment in this sector.

Rob

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#10

Does it provide 1099div or K-1 for tax returns?

It is an MLP(Master Limited Partnership) and issues a K-1 which IMHO is a POSITIVE and not a Negative.You might ask—HOW POSITIVE IS IT?

I have mentioned a few times that my portfolio value has increased SIXTEEN TIMES in the past 13 1/2 years. The bulk of the portfolio growth and growing tax deferred income came about from owning MLP’s.

b&w

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#11

Last year I studied MLP’s a bit and held KMI for awhile

Hi Joe: Not meaning to be disrespectful but KMI IS NOT AN MLP----IT IS A C-Corp—Big difference—And if Nelson at Valuentum says KMI is an MLP he doesn’t know what he is talking about

b&w

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#12

Moneyman is correct. Generally speaking, MLPs should not be owned in an IRA. This is because the pass-through income on the K-1 is generally operating income for reporting purposes, and if you’re over $1,000 of operating in your IRA, its considered unrelated business income. (Note that the $1,000 is determined by the K-1 pass-through income, NOT the amount of dividends/distributions received.) Unrelated business income tax is particularly punitive to individuals, as anything over $12,300 is taxed at 39.6%, and you get to file Form 990-T on top of your usual tax return.

As an aside, this is my first time posting to this board, despite being a lurker since about post 3000. Thanks for all the hard work and thoughtful discussion that everyone contributes to this board. I’ve learned a lot, and finally got to post something relevant to my skills, being a CPA. Hopefully I will contribute more going forward.

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#13

Does anyone know if there are problems using an IRA for a MLP?
This is a good suggestion, if there are no unintended consequences.

#14

KMI WAS an MLP recently change to a C Corp in the last year or 2.

Rob

1 Like
#15

Hi Roy:

Just a heads up for those who like to keep tax reporting simple… Assuming AM is required to report K-1’s, I’d stay far away. The amount of support to individual taxpayers varies firm to firm, so unless you already use a tax accountant to file your U.S. taxes, you may be into quite an adventure.

The point here is do you want to keep taxes simple (Which I translate to mean “paying a lot”) or is your goal to “make money in the market” BIG DIFFERENCE

If I can get $50K or $100K or more in income and defer the taxability of that income (currently about 33%) into the future or maybe forever while leaving the income for me to spend or reinvest FOR MY BENEFIT I wouldn’t worry too much about paying an accountant to do my return.
I recently read that Warren Buffett has about $50B to $60B in tax deferred cash in BRK invested in businesses.
I want to thank you for your post which I have reproduced here because it is posts like that that intimidate people away from investing in MLPs and by doing that you keep the prices low allowing me and others to continue buying at lower prices

b&w

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#16

Hi Saul:

I was buying AM actually as a growth vehicle, by the way, rather than for the dividends, and considered the growing dividends as one of the things that would make the stock price rise, and the actual dividends I would receive would be just an extra benefit.

IMHO Income is the important criteria. MLP’s are a tax shelter investment. The dividends in MLPs are totally tax deferred and called distributions. Ownership is in partnership “units” and not called “stocks” Partnerships do not pay taxes on the distributions. The taxability is passed through to the individual unit holders Most and sometimes all of the income is deferred by depreciation and other accounting procedures.

INCOME is NOT AN IMPORTANT METRIC with MLPs–The important metric is DCF (Distributable Cash Flow) and should be at least 1.0 coverage based on distribution payments Under 1.0 coverage is a red flag that they aren’t covering distribution payments. Over 1.0 means they are covering their distributions.

b&w

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#17

Or buy it in an IRA.

This is a partnership unit and not a stock. It is a TAX SHELTERED INVESTMENT

IMHO —IT IS NOT APPROPRIATE for a tax sheltered investment to be in an IRA (which is a tax shelter itself)

Various benefits are lost by putting an MLP in an IRA. Not recommended.

There are some MLP Primers available to read that can be googled to get a better understanding about MLPs

b&w

1 Like
#18

Rob:

MLP’s have a different tax treatment. In a tax deferred account there is a penalty for too large a position (as I recall something like $1500 in dividends/year). Additionally the dividends are tax deferred. Make sure you are aware of the special tax treatment in this sector.

Not exactly true–That’s why I said MLPs don’t belong in an IRA.

http://www.morganstanleyfa.com/public/projectfiles/4735a09e-…

Here is the link to the Morgan Stanley MLP primer from 2013. There are others on google

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#19

Hi Stoney:

Unrelated business income tax is particularly punitive to individuals, as anything over $12,300 is taxed at 39.6%, and you get to file Form 990-T on top of your usual tax return.
I only wish that everyone here would have a large enough position in an MLP that would produce $12,300 of UBIT that would trigger the 39.6% tax which would be about $4500 tax. You probably would need an investment of $1M or more.
The 990-T form you refer to, is not filed by you. It is filed by the custodian for the IRA.

You can paint negativity into anything, but MY PORTFOLIO IS UP 16 TIMES IN 13 1/2 years of investing mostly in MLPs. I wasn’t born with an MLP certificate in my hand I learned in spite of the nay sayers and so can anyone else that sets their mind to it.

b&w

#20

Hi John:

After 12 years investing in MLPs, I would not put them in an IRA—It is a tax sheltered investment and belongs in a taxable account IMHO

b&w

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