Goldman Energy Sweet Spot and Risks

A train carrying crude oil derailed and exploded this past Saturday, killing a significant number of people in a Canadian town. The police are investigating the incident, which is a reminder of the special risks in energy transportation. Even so, investments in the storage, transport and processing of oil or natural gas are popular in the United States, especially via tax-advantaged master limited partnerships.

MLPs offer relatively high yield at relatively low risk, a combination that has attracted investors as well as new products—thus Goldman Sachs has in the works a fund that is to invest primarily in midstream MLPs.

Midstream means the targets of opportunity are neither in oil and gas exploration nor in refining the final product. They deal with all the stages in between. Despite the commodity slump, midstream MLP prospects look reasonably bright from an economic perspective—a stronger economy creates greater demand for the services.

But among the risks are accidents and catastrophic events. Midstream MLPs may own or operate pipelines, tankers, storage and processing facilities and in part rely on crude shipments by rail. Disruptions affect their returns.

As the Goldman Sachs fund’s prospectus warns, midstream MLPs “are subject to supply and demand fluctuations in the markets they serve which may be impacted by a wide range of factors …” These include increased regulation, interest rates and catastrophic events.

The Obama administration’s plan to introduce new environmental regulation could have a negative effect on such investments. Also relevant is the Federal Reserve’s tapering of quantitative easing, with the likely result of higher interest rates.


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One Response to “Goldman Energy Sweet Spot and Risks”

  1. Energy Renaissance Fuels Midstream Partnerships | HedgeFundSmarts Says:

    […] Sachs is among the players taking advantage of midstream opportunities. The bank recently introduced an MLP income fund. Kyri Loupis a managing director at Goldman Sachs Asset Management, said they did so because of the […]

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