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  • marklibera marklibera Aug 17, 2009 11:58 AM Flag

    Alternatives to MLPs

    Pam, a few comments on switching to royalty trusts instead of MLPs. I have invested in royalty trusts like HGT and DOM (they both produce nat gas). You should know that the distributions on these can be very volatile. The distributions depend on the production and the price of the commodity, usually with a lag (i.e., today's distribution is usually based on production amounts and prices from 2 months earlier). Production can be effected due to the maintenance schedule, and prices depend on where the gas is delivered. Not every RT uses the NYMEX or Henry Hub price -- some can sell at other "hubs" that have a substantial discount from those prices (when I owned HGT, a poster told me that their gas was sold using the "Mid continent hub" price which declined dramatically because of excess supply in that region -- HGT fell from $35 to single digits when their distribution was cut, but I got out with little damage).

    One tax advantage of owning a RT is that you get a depletion deduction against your royalty income, but if you own the RT in an IRA, you won't get that deduction.

    I found that the MLPs have higher distribution yields than the RT's and you still get the benefit of price appreciation when the commodity increases in price because the MLPs are able to acquire new properties (which the RTs can't). Good luck.

    PS. It looks like the EVEP CEO was correct about his prediction on nat gas prices -- they look like they are headed under $3.

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