U.S. shift towards energy self-reliance bolsters MLPs

The U.S. currently holds a preeminent position in the Energy world, partially due to our ability to retrieve natural gas and oil from shale. There are four main criteria that have contributed to this unique situation:

  • Water
  • The property rights of individuals
  • Infrastructure
  • Drilling technologies (fracking and horizontal drilling)

The U.S. is unique in that we have all four essential elements to produce oil and natural gas from shale. The combination of factors has proved quite advantageous, as some industry experts estimate that roughly 90 percent of oil and natural gas is contained in shale formations, with the remainder held in pools.

While drilling for oil used to be hit or miss, the focus on shale – which can be located using sounding techniques and other methods – has made extraction more reliable. Our nation has abundant energy resources, and these make the U.S. strong.

A perfect example of how these resources can benefit a nation is the U.K.’s discovery of coal, which helped the nation lead the industrial revolution in the 1800s.

As America depends more on its own sources of energy and natural gas and grows less reliant on foreign ones, this shift will help the U.S. remain the preeminent world power. The nation’s transition toward being self-reliant in terms of energy has changed the country’s infrastructure needs.

Six years ago, before the shale revolution took place, we were building LNG (liquefied natural gas) import facilities. These are now being converted to export facilities! This is because MLPs have invested heavily in energy infrastructure to take advantage of the abundant supplies of natural gas the U.S. has unlocked over the last eight years.

This buildup of infrastructure has benefited investors in MLPs, and currently, they can get a 6 percent yield from MLPs with distributions that should rise between 6 and 7 percent this year. Generally speaking, many of these partnerships are undervalued, which provides a strong growth opportunity as the MLP Alerian index is down 20% from its high.

At DeWitt, we are looking to select the best MLPs for our clients, not just buy into a passive index. All the tax benefits of direct ownership of MLPs is preserved with our strategy along with the potential of out-performance. For more information, please don’t hesitate to call or email us.

Dave’s Thoughts of the Week – Week of May 18, 2015

Before the start of trading on May 13, The Williams Companies, Inc. (NYSE: WMB) announced it would buy its limited partnership, Williams Partners L.P., which trades under the ticker WPZ. Shortly after this announcement, WPZ opened 20 percent higher and WMB opened up 5 percent. This did not surprise us, as we think it is part of a larger trend that we can expect to see grow in the coming months.

Before the start of trading on May 13, The Williams Companies, Inc. (NYSE: WMB) announced it would buy its limited partnership, Williams Partners L.P., which trades under the ticker WPZ. Shortly after this announcement, WPZ opened 20 percent higher and WMB opened up 5 percent. This did not surprise us, as we think it is part of a larger trend that we can expect to see grow in the coming months.

The Williams Companies’ recent purchase is an example of general partners consolidating LPs. By doing so, GPs can have one entity instead of two, a situation which creates many cost reductions, improved capital efficiencies and greater ability to make acquisitions. Once a GP completes the process of buying its LP, it will look to acquire other MLPs that fit its structure and growth objectives.

You can expect this consolidation to affect energy transportation needs. The U.S. previously imported oil and natural gas from other nations, which created the need for pipelines going from the shores into the country. However, the nation has shifted to producing its own energy and spreading it out, which has fueled a need for domestic infrastructure. MLPs provide these pipelines, and sometimes the quickest way for a firm to obtain the required infrastructure is to buy an MLP in the area where it wants to grow and then build that partnership up.

Basically, what we are seeing is that the GP buys an LP – which creates a larger entity – and then the next stage involves larger MLPs buying smaller ones.

During our investment selection process, we are looking for smaller MLPs that would be a good fit for the larger players Рsuch as Kinder Morgan and The Williams Companies. More specifically, we are seeking smaller MLPs that hold strong growth potential and exist in areas where the more sizeable partnerships want to expand. 

 

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