So long as the federal government smiles upon tax-favored energy infrastructure projects, market participants say, not much can stand in their way as a growth and yield investment—not even low gas and oil prices, such as those caused on Monday by Saudi Arabia’s decision to cut prices on the oil it sells to the U.S.
Master limited partnerships in energy pipelines are increasingly popular with tax-conscious investors who are hungry for income in the current low-interest-rate environment, said Leonard Weiss, senior VP of investments with the Weiss Wealth Management Group of Raymond James in Farmington Hills, Michigan.
At the same time, MLPs protect investors from commodity price swings because pipelines simply act as a “toll road” that carries upstream products in distant locations to downstream refiners, Weiss said.
“Midstream pipeline carriers don’t own oil or gas, so the price of oil or gas is irrelevant to them. What’s relevant is that pipeline capacity is rented at a pre-negotiated fee to oil companies for many years at a time,” he said.
MLPs are a growth market because a game-changing U.S. energy renaissance is under way, Weiss said, asserting that the nation’s large shale-rock fields, including the Bakken, Eagle Ford and Marcellus fields, hold more oil reserves than Iran and Saudi Arabia combined and doubled.
Annual cash distributions on MLPs range from 4% to 12%, Weiss said. He added that MLPs are a good play for investors because the investor captures cash distribution growth by statute.
“A publicly held company’s dividend goes up because of the benevolence of the board of directors. A pipeline MLP raises its distribution to stay in compliance with tax laws,” Weiss said.
The Alerian MLP Index has outperformed both the S&P 500 and Dow Jones Industrial Average indexes for the last 10 years, Weiss said, but added that the number of MLPs has proliferated so investors must be careful about where they put their money.
Weiss named Enterprise Product Partners (EPD) as a major player in the space, with a $60 billion market cap that makes it larger than General Motors, Ford and Comerica Bank combined. EPD has raised its cash distribution every quarter for the last 41 consecutive quarters, he said.
Improved shale-rock extraction technologies have led to the renaissance-level rise in U.S. oil and natural gas production, with domestic shale fields pumping a record 1.1 million barrels a day of output so far in 2014, according to the U.S. Energy Information Administration.
But this embarrassment of riches had led to a problem for energy investors: companies are pumping out oil and gas at such a fast clip that demand can’t keep up with supply. As a result, prices are going down.
Will Riley, co-manager of Guinness Atkinson Global Energy Fund (GAGEX), said that oil prices for benchmark West Texas Intermediate crude currently stand at approximately $80 per barrel versus $100 per barrel six months ago. Similarly, the price of a barrel of global benchmark Brent crude oil has dropped to approximately $86 from $100 in the same period, Riley said.
“There’s been a slowdown in global oil demand growth, and that’s been coupled with an acceleration in supply forecasts,” Riley said. “The amount of oil produced is rising faster than demand is rising. If you ask why oil is rising more quickly, you would firstly see the growth in shale oil production in the U.S., and secondly, there’s been a recovery in supply in Libya.”
However, Riley expects to see a rising average oil price over time, with a barrel of Brent ranging between $130 and $150 by the end of the decade. That would be a positive for energy infrastructure MLPs, he said.