Energy Related Master Limited Partnerships are a Disaster for Investors
Jan 20, 2016 / Author Vernon Litigation Group
Other investment-related information , Tags: Inc., Leveraged Oil ETF, Natural Resources Partnership, Sandridge Energy, Seadrill, Seadrill CIE Cobalt International Energy, UBS leveraged MLP fund, United States Oil ETF
Energy related “Master Limited Partnerships” (MLPs) and other Oil and Gas investments are complex investments that have been wildly oversold to conservative retail investors over the last several years. Some of the financial institutions that have pushed the sale of these products include Morgan Stanley and UBS, as well as many other smaller purported investment advisors. Unfortunately, many of the investors that purchased these products have suffered losses that have far exceeded the losses being incurred in broader markets.
BREAKING DOWN A MASTER LIMITED PARTNERSHIP
An “MLP,” known as a “publicly traded partnership” by the IRS, is a combination of a traditional limited partnership with a traded security and its associated liquidity. Unlike typical securities where investors buy shares of stock in corporations and collect dividends, an MLP is not associated with a corporation. Legally, an MLP is a partnership, not a corporation.
In terms of taxes, this distinction is significant. Unlike corporate-based investments, which are taxed first at the level of the corporation and then at the level of the shareholder, in an MLP, only the individual partners pay taxes on their share or “units” of the profits.
Another way that an MLP is unlike a traditional partnership is that shares or units of an MLP are traded on a stock exchange. If you own a share in an MLP, you are considered a limited partner. As an owner of a share, you have no participation in the partnership’s management, which is in the hands of the general partners.
The MLP makes payments to the limited partners, and any additional payments that might exceed the partnership’s income aren’t classified as dividends – they are treated as a “return of capital.”
If you are a unit holder in an MLP, your initial tax basis is the amount you pay for the units. Your basis is then decreased for each distribution and increased with each allocation of income. Some of the distribution can qualify as returns on the investment capital, which reduces the unit holder’s taxable basis.
Bottom line? MLPs aren’t subject to income tax, which means that there is more cash available for distributions than if the company were incorporated. This means that MLP units are worth more than similar shares of a corporation.
BREAKING DOWN THE RISKS
Financial professionals who laud their potential for high return on investment often push MLPs. However, these are not conservative investments. As retail investors are learning, the truth is that MLPs are highly risky investments subject to profound and swift decreases in value. This is due to several factors, including:
MLP’s are seriously affected by market changes, using debt to maintain the required levels of cash. Economic instability has a significant impact on an MLP’s value.
Any decline in commodity prices, whether due to government regulation or market changes can significantly impact MLPs, as they underpin the infrastructure associated with the energy sector.
The recent drop in energy prices (and the resulting market decline and volatility) has painfully revealed and highlighted both of the above-mentioned risks, which we suspect was not highlighted for investors at the time of purchase (by the allegedly trusted investment advisor). We suspect some investors may have claims for damages for the incompetent or conflicted advice that was given to them.
If you have incurred significant losses as the result of MLP investments or other energy-related investments, you should contact the Vernon Litigation Group to determine whether your losses were caused by the malpractice of your trusted financial institution.
Financial professionals in the United States consistently over-concentrate and inappropriately recommend MLPs and Oil and Gas investments by downplaying, ignoring, or concealing the risks involved. And, in doing so, many financial advisors working for Wall Street firms such as Morgan Stanley and UBS provide incompetent advice or advice driven by irreconcilable conflicts of interests. For example, the risks and volatility of some of these energy-related products make them unsuitable for many investors. This is especially the case where high concentrations of these products exist in a portfolio purportedly designed for safety and income.
Below is a list of investments that our firm is currently investigating:
CIE Cobalt International Energy, Inc.
MLPL UBS leveraged MLP fund
ERX Leveraged Oil ETF
DIG Leveraged Oil ETF
OLO Oil ETF
USO United States Oil ETF
XLE Leveraged Energy ETF
UNG US Natural Gas ETF
NRP Natural Resources Partnership
EVEP EV Energy Partners
LNCO Linn Co.
GBSN Great Basin
SD Sandridge Energy
RECOVERING YOUR LOSSES
Vernon Litigation Group represents clients in courtroom litigation, mediations and arbitrations throughout the United States. Our lawyers have collectively represented thousands of investors in FINRA and other securities arbitration and litigation claims nationwide and recovered millions of dollars from financial institutions, both large and small. Please contact us to discuss your rights if you have suffered significant losses in energy investments recommended by your investment professional. Our initial consultation regarding your possibility of recovery of your losses is confidential and free. For more information, visit our website at vernonlitigation.com or contact Vernon Litigation Group by phone at 1-877-649-5394 or by e-mail at firstname.lastname@example.org to speak with an attorney at Vernon Litigation Group.