By the time the 1980s ended, the once highly touted upstream master limited partnership (MLP) investments of that decade had become synonymous with Mostly Lackluster Performance-and that was on a good day. Sadly, most yield-hungry retail investors watched their cash distributions gradually dwindle as these partnerships, beset with falling commodity prices and rising costs to shore up short-lived reserves, ultimately became wasting assets. That was more than 15 years ago. Since then, oil and gas royalty trusts, particularly in Canada, have managed to draw favorable nods from investors seeking yield in a low interest-rate environment. But Canadian upstream trusts, with an average reserve life index of eight years, have historically relied on acquisitions for growth and that market is getting more expensive and attractive buys, scarcer. Meanwhile, U.S. royalty trusts, with an average reserve life of 11 years, are closed-end structures and hence, do not have the ability to make acquisitions. There is, however, a distinctly different type of yield-oriented, tax-advantaged structure that has recently emerged in the U.S. upstream: the limited liability company (LLC). It debuted in the public E&P space in mid-January via the IPO of Pittsburgh-based Linn Energy LLC (Nasdaq: LINE), and it may resolve many of the investment issues that have dogged the MLP and royalty-trust structures. To say that an LLC is a growth-oriented, flow-through structure designed to distribute cash to investors in a sustainable, tax-efficient manner risks oversimplification. A better way to understand how it works is to focus on how it differs from a traditional C-Corp, a royalty trust and an MLP. For more on this, see the April issue of Oil and Gas Investor. For a subscription, call 713-260-6441.
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