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One of the Most Underreported Facts of 2012

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Here’s a bit of good news that didn’t get the attention it probably should have—2012 saw the greatest increase in domestic crude production ever.

Even better? 2013 is already on track to beat it.

It’s one reason Brian Watson is so bullish on master limited partnerships that deal in the space, especially those that invest in the “midstream” sector of oil and gas pipelines.

“We’ve been told for so long, and have been preparing for so long, for diminishing crude in this country,” Watson, director of research and portfolio manager for the MLP firm SteelPath, told attendees at TD Ameritrade Institutional’s annual conference in San Diego on Friday. “In the past three years we’ve had a turnaround in this assumption.”

This turnaround is creating huge demand for midstream products and services, he said. It might also be a reason MLP firms like SteelPath are getting noticed. The mutual fund behemoth OppenheimerFunds acquired SteelPath last year.

“We’ve seen capital expenditures in the midstream space of around $40 billion over the past few years,” Watson adds. “We’ll see that grow to around $60 billion over the next few years.”

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He estimates these “good fundamentals for growth” will allow the sector to maintain the current market cap-weighted distribution growth of 7% per annum, but he also notes not all MLPs are created equal.

“The level of commodities exposure is very important,” Watson says. “Having a high amount of commodities isn’t a bad thing, but you have to know what you’re buying.”

SteelPath has estimated a $90 per barrel base case for crude for the past three years, but recently lowered it to $80 per barrel because of the increase in supply, something Watson believes will have a minimal effect on the market.

“Pipelines have been reversed to help relieve some of the pressure on Midwest refineries,” he concluded. “Logistically, it’s a tight system across the country. A shutdown in one part can negatively affect the whole. The spending currently is aimed at solving bottlenecks, which they will work out. This means it’s very good for the midstream space.”

The SteelPath MLP Income Fund announced a dividend on January 4 of 6.46 cents per share.