The Rachlin Group – MLPs and Domestic Energy Infrastructure

Whenever poNeuberger_Berman_logo2ssible, we like to share resources from our speakers and partners in the Family Office Club.  The Rachlin Group produced the following educational article for their November 2015 newsletter and you can read it in its entirety here.

The Rachlin Group

November 2015       

MLPs and Domestic Energy Infrastructure


MLPs have attracted investors for several different reasons. Some of those are above average dividend yields with the opportunity for growth, and a tax-efficient way to invest in the growth in the build out of domestic energy infrastructure. Despite how difficult the recent price environment has been for MLPs, we believe the investment thesis remains intact. As midstream MLPs primarily derive their cash flows through increasing volumes of commodities through their systems, a lower commodity price environments can frequently lead to higher demand, a point we believe that has largely been missed by the market. In fact, September US fuel consumption rose to the highest level in five years. Natural gas consumption has also increased (year-over-year) every month since January, through the last published report in August 2015. It is this growth in demand that makes this period far different from what we experienced in 2008, the last time MLPs had a significant correction in valuations.

Lower oil and natural gas prices may affect growth rates for some MLPs as producers temporarily cut capital expenditures, but this near-term change does not affect our positive long-term energy infrastructure thesis. We believe the US is ideally positioned as a low cost producer to continue to grow its oil and natural gas production and the requirement for additional infrastructure to support this growth will continue, albeit at perhaps a slower pace the longer crude prices remain depressed.

In its 2014 midstream infrastructure study, the Interstate Natural Gas Association of America revised upward its initial 2011 study quantifying the capital required to be spent on North America midstream infrastructure investments. The report concluded that North America will need to spend an average of $30 billion annually between 2014 and 2035 on natural gas, crude oil, and natural gas liquids midstream infrastructure. We believe that the secular infrastructure theme remains intact and the leading MLPs will remain a vital part of the build-out of the North American energy landscape.

Our investment focus has always been on selecting companies with predominately fee-based businesses that, in our view, are best positioned to grow cash flows consistently through various market cycles. We believe midstream MLPs continue to be well positioned to capitalize on the long-term build-out of US energy infrastructure tied to the US Shale Revolution. Investor fear around an exaggerated correlation to commodity prices and the volatility it produces ultimately creates a dislocation between MLP prices and their fundamentals and in our view, creates buying opportunities.

This material is provided for informational purposes only. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Certain products and services may not be available in all jurisdictions or to all client types. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns shown reflect reinvestment of dividends and distributions. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. The performance of asset classes following interest rate hikes has varied significantly and are no indication of how the markets may perform following any future interest rate increases. MLPs and equities have different overall risk-return characteristics which should be considered before investing.
Master Limited Partnerships (MLPs) are limited partnerships that are publicly traded and which have the tax benefits of a limited partnership and the liquidity of a publicly traded company. As an income producing investment, MLPs could be affected by increases in interest rates and inflation. The total market capitalization of the MLP universe is approximately $500 billion (Sources: Bloomberg and Alerian). Investors should consider relative exposure and liquidity in this asset class before making an investment.
S&P 500 Index: Consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index (stock price times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value. The “500” is one of the most widely used benchmarks of U.S. equity performance. As of September 16, 2005, S&P switched to a float-adjusted format, which weighs only those shares that are available to investors, not all of a company’s outstanding shares. The value of the index now reflects the value available in the public markets.
The Alerian MLP Index is a composite of the 50 most prominent energy master limited partnerships calculated by Standard & Poor’s using a float-adjusted market capitalization methodology. The index is disseminated by the New York Stock Exchange real-time on a price return basis (NYSE: AMZ). The corresponding total return index is calculated and disseminated daily through ticker AMZX.
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About Richard C. Wilson