Chances are that if you’re not invested in one, you’ve at least heard about master limited partnerships (MLPs), even the micro-cap variety, over the past few years. MLPs offer some serious tax breaks and exposure to the energy sector in a security that trades just like a stock. Simply put, MLPs get a tax treatment that is similar to those of real estate investment trusts (REITs) or royalty trusts because MLPs distribute a large share of their net income to shareholders. And to be considered an MLP, the partnership must earn at least 90% of its income through businesses related to commodities, natural resources or real estate.

Micro-cap stocks get overlooked

Indeed, the energy patch is a great place to find MLPs, but investors typically focus on large- and mid-cap names. They certainly don’t go thinking about micro-caps. Too bad because that means a stock with a market cap of less than $255 million that’s up 5% this year is going ignored. And it should be noted that this 5% return does NOT include a yield in excess of 6.3%.

The micro-cap stock is Blueknight Energy Partners, L.P. (Nasdaq: BKEP), an Oklahoma-based provider of integrated terminalling, storage, processing, gathering, and transportation services for companies engaged in the production, distribution and marketing of crude oil and asphalt products.

Diversified energy assets provide core value

Blueknight has a portfolio of midstream energy assets consisting of approximately 8.1 million barrels of crude oil storage facilities located in Oklahoma and Texas; approximately 1,285 miles of crude oil pipeline network located primarily in Oklahoma and Texas; approximately 300 crude oil transportation and oilfield services vehicles deployed in Kansas, New Mexico, Oklahoma, and Texas; and approximately 7.4 million barrels of combined asphalt product and residual fuel oil storage facilities located at 45 terminals in 22 states.

With MLPs…it’s the distribution that counts

Remember, the primary reason any investor gets involved with an MLP is the dividend, or as it’s called with MLPs, the distribution. To that end, it’s crucial that the MLP be profitable to sustain and increase the distribution. Blueknight was profitable in the fourth quarter of 2011, reversing a year-earlier loss. In fact, Blueknight was profitable on an annual basis in 2011.

“Our financial results for the fourth quarter of 2011 reflect the successful completion of the recapitalization and resolution of predecessor litigation. The recent payment of a quarterly distribution on our common units is a significant achievement. Our first distribution since 2008, the payment is an indicator of the progress we have made to lay a foundation to support growth as we meet increased demand for our midstream services,” commented J. Michael Cockrell, Blueknight Energy Partners’ president and chief operating officer, in the company’s earnings statement.

There are more reasons to think micro-cap when it comes to MLPs, but specifically think Blueknight. The stock trades for less than 15 times forward earnings; which means it’s cheaper on that basis AND has a higher yield than Enterprise Products (NYSE: EPD) and Kinder Morgan (NYSE: KMP), the two largest U.S. MLPs.

See, good things do come in small packages.

Posted by the Research Staff
MicroCapMarketPlace                                                                                                                                                                                                                               Mike Casson, Senior Analyst