Chidem Kurdas
Where is the investors’ sweet spot in the fast-changing U.S. energy industry? It may be right in the middle, between the “upstream” of extraction and “downstream” of end users.
Growing oil and gas production due to technological advances in drilling and hydraulic fracturing – often called the shale revolution – is creating immense demand for new pipelines and other transportation and storage facilities.
The energy midstream is dominated by master limited partnerships, which have the tax advantage of being subject to the federal income tax at the partner level only. MLPs now have greater investment possibilities, as well as institutional clients seeking to benefit from the energy renaissance.
There are numerous opportunities for MLPs and other midstream producers as production grows, says Jody Meraz, a managing director at Kayne Anderson Capital Advisors, a leading investor in energy. The Shale revolution is a multi-decade opportunity, he said, speaking at a Capital Link conference. “Shale production infrastructure needs in the coming years will drive growth.”
An earlier estimate for midstream investment needs was $250 billion, but a more recent estimate came to $640 billion and Mr. Meraz expects more—$900 billion in the next 12 years. He pointed out that MLPs outperformed the S&P 500 index in 12 out of past 14 years and provide consistent growth in dividends. But there’s no such thing as the average MLP and being selective is more important than ever, he said.
Kayne Anderson managed $26 billion in assets for institutions and high-net-worth and retail clients as of the end of April.
Goldman 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 favorable economic fundamentals and the expertise Goldman has built managing MLP investments since 2009. These are currently valued at $10 billion.
Daniel Spears, a portfolio manager at Swank Capital and president of The Cushing Funds, describes hydraulic fracturing as a disruptive technology that changed the energy game. Large amounts of oil and gas produced overwhelmed the energy infrastructure in North America, he says.
In response, the MLP sector is growing fast. There may have been only 20 MLPs in 2000; by a recent count there were 114. MLPs are not a cottage industry any more, says Mr. Loupis. Goldman Sachs would like to start another MLP investment fund. He also was speaking at the Capital Link conference.
Midstream energy investments are relatively protected against volatility in gas and oil prices. But they are subject to the risks of rising interest rates, increased regulation and catastrophic events, including explosions.
Tags: Capital Link, Goldman Sachs, Kayne Anderson, Shale Revolution, Swank Capital, The Cushing Funds
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