The MLP structure, having reshaped the energy landscape in the past several years, will increasingly be used in the US to own critical energy infrastructure assets. We believe the institutionalization of the industry (p. 21), along with at least a 3-year investment capex back-log (p. 45), are secular tailwinds that will support stock (unit) prices. The distinctive characteristics of MLP investing are hard to match: 1) growth in distribution payouts on an annual basis (MSe of 8-10% on average in 2013-15); 2) attractive upfront yields (6.0% mean in our LP coverage); 3) solid, even if not spectacular, total returns (MSe of 8-12% for next 12 months); 4) lower risk than other industries (average Beta of 0.72); and 5) tax advantages for investors (deferred tax on distribution payouts). This asset class will be supported by a long runway of domestic investment in energy infrastructure (MSe of $125b over the next 3-4 years). MLP stocks' yield spreads to interest rate alternatives (along with MSe forecast 10-year yield of 2.0-2.5% into 2014) should continue to attract new participation from all segments of the investing community. In this version of our primer, we update our macro view, with a focus on natural gas liquid fundamentals and production economics as emerging re-source plays have unlocked significant value-creation opportunities.
Relatively stable distribution payouts in a variety of economic environments. MLPs' core “midstream” (which we define as hydrocarbon handling and transportation) oil and gas pipelines typically use a “toll-road” or “fee-for-service” business model to handle, process, and trans-port oil, gas, gas liquids, and refined products from the point of production to a distribution point. The barriers to entry are high (e.g., cost to build, regulatory), and these entrenched assets generally have predict-able cash flow from volume contracts and somewhat limited commodity price exposure (though it varies).
Eoin Treacy's view The evolution of the USA's energy sector
from being largely dependent on imports to one where it is in a position to
export a wide number of petrochemical products is having far reaching consequences
for the economy. The pipeline sector in particular has been a beneficiary of
this change since it facilitates trade in energy products.
The fact that natural gas is extending its advance above $4 also increases the possibility that producers will be more inclined to increase supply which should further bolster the energy transport sector.