Risks Associated With Investing In Master Limited Partnerships

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Risks Associated With Investing In Master Limited Partnerships

Master limited partnerships (“MLPs”) are complex investment vehicles that have become massively popular in the past few years during the low interest rate environment. A MLP is a publicly traded limited partnership with two types of partners: the general partner, who is responsible for managing the MLP and is compensated for performance, and the limited partner, the investor who provides the capital to the MLP and receives periodic income distributions. Unlike most partnerships, shares of MLPs can be bought or sold on a stock exchange. Just like any partnership, the problem with being a limited partner is that such a partner has no role in the management of MLP.

Unfortunately, MLPs can be very risky investments, as they fluctuate greatly with the price of oil and gas. Usually reserved for sophisticated and high-net-worth investors, these investments are not suitable for the average investor. However, a number of financial advisors sell them to their clients anyway, without fully disclosing the potentially catastrophic risks associated with these investments.

Most MLPs invest in the natural resources infrastructure. This is usually a risky area, given the swings on energy and commodity prices.

These investments tend to be highly illiquid and require long holding periods. This can render an investment unsuitable for a particular investor, if they are at an age or place in their lives where access to cash is important, or if the investor actually told their financial professional that liquidity was important to them.

Oil and gas limited partnerships, like other alternative investments, also tend to be high-commission products, giving brokers an incentive to recommend and sell to unsuspecting investors without making the necessary suitability analysis required of them by FINRA Rules and applicable securities laws.

The structure of a MLP mandates that most of the income be distributed to investors. This often forces MLPs to borrow funds to be able to pay dividends. The added risk is thus the leverage created by the MLP borrowing funds, especially in downturns in the economy.

According to a number of reports, many oil and gas MLPs have lost more than 60% in the past twelve months.  These include:

  • EMES     Emerge Energy Services LP           -88.88%
  • LNCO     LinnCo                                                -83.00%
  • LINE       Linn Energy LLC                              -81.69%
  • BBEP      BreitBurn Energy Partners LP      -80.39%
  • HCLP      Hi-Crush Partners LP                     -78.80%
  • MCEP    Mid-Con Energy Partners LP        -76.07%
  • EVEP      EV Energy Partners LP                  -75.15%
  • LGCY      Legacy Reserves LP                        -74.32%
  • MEMP   Memorial Production Ptrs LP       -73.48%
  • VNR       Vanguard Nat. Resources LLC      -73.23%
  • SDLP      Seadrill Partners LLC                     -64.67%
  • PAGP     Plains GP Holdings                         -63.98%
  • KMI        Kinder Morgan Inc                          -62.68%
  • ETE        Energy Transfer Equity LP            -61.01%

If you or someone you know has lost money from investing in a MLP, please contact Richard Frankowski at 888-741-7503 to discuss your potential legal remedies or complete the contact form.

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