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SteelPath’s portfolio management and investment research teams share their insights.

Flash Commentaries

SteelPath’s investment and research team periodically releases Flash Commentaries to address timely issues affecting the MLP space.

Date

Commentaries
Natural_Gas_Price_Weakness_and_What_It_Means_for_Midstream_MLPs

Natural Gas Price Weakness and What It Means for Midstream MLPs

Sean Wells

As the price of natural gas has fallen below $3.00 per mmbtu (as priced at Henry Hub) and made a bid toward the
$2.00 level, there has been some concern that the decline could result in collateral damage to midstream Master Limited Partnerships (MLPs). This Flash Commentary is intended to provide investors both with our perspective on the decline in natural gas prices as well as an overview of how midstream assets and services may be impacted by such a decline. As will become evident, we generally believe the sector has only minimal exposure to the price of the commodity and we reiterate our thesis that the owners and operators of true energy infrastructure assets remain largely unaffected by commodity prices.

Read The Full Text

Analyst Insights

For our Analyst Insight publications, a series of questions are posed to SteelPath’s investment and research teams on a topic that has recently been on investors’ minds. Read or hear our team’s most recent thoughts.

Date

Insights

Speaker

open

February 2012

Weathering the Storm: MLPs Resilience

Sean Wells

Weathering_the_Storm:_MLPs_Resilience
  • Turmoil in Europe along with lowered growth expectations for many developed nations led to elevated uncertainty and, therefore, volatility in markets around the globe and in the US during 2011. As the situation continues to unfold, investors are understandably concerned that their financial assets could be impacted should such volatility reemerge particularly given the financial collapse of 2008-2009 and its impact remains fresh in investor minds.
  • During the 2008 financial crisis, the markets feared that major lending institutions would become insolvent as the value of their mortgage related or linked assets deteriorated. The collapse of the value of these assets forced financial institutions to contract their balance sheets and, of course, a handful of major financial players collapsed under this pressure. The resulting ripple effect across the markets and economy are well known.  Euro zone fears have a similar context.
  • When assessing a company’s ability to “weather a storm” we believe it is most important to review leverage and credit metrics. From that perspective, the sector appears in much better shape today than in the 2008 period. Today, the sector average debt to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) stands at 3.2x versus the 3.7x associated with the pre-2008 period.
open

May 2011

Understanding General Partnerships

Mark Swaringen

Understanding_General_Partnerships
  • General partner Master Limited Partnerships (or GP MLPs) have been in the news of late with two initial public offerings (IPOs) coming on the heels of a number of GP MLP buyouts and there is often some confusion about investing in this small and less understood subsector.
  • An MLP’s equity ownership is generally divided between limited partners (LP) and a general partner (GP). The limited partner interests are represented by the limited partner units that are publicly traded. Traditionally, the general partner interest was retained by the MLP’s sponsor, usually an integrated energy firm, who would run and manage the business of the MLP.
  • The GP sponsor will typically receive a payment referred to as incentive distribution rights (IDRs). Conceptually, the purpose of the IDR mechanism is to incentivize the sponsor to grow the MLP’s assets and the distributions to its limited partners. At IPO, the GP sponsor typically only receives 2% of the cash distributions paid by the MLP, a share equal to its nominal ownership interest, but, through the IDRs, as the distribution rate is increased the GP can receive an increasing share of cash flows distributed by the MLP.
  • Because of the design of IDRs, investing in GP MLPs can present both a great deal of risk as well as reward. GP MLPs may offer higher growth profiles but come with much higher risk and we find that value proposition less unique.
open

January 2011

Sorting Out Investing Options

Maria Halmo

Sorting_Out_Investing_Options
  • The most common concern raised by those seeking to invest in the MLP sector through a tax-advantaged structure or account relates to UBTI. A direct investment in MLPs can generate UBTI. The SteelPath Funds (the Funds) are not expected to generate UBTI and therefore tax-advantaged investors should be able to invest in the Funds without related concerns and investors can hold our Funds in their IRA or 401(k) accounts.
  • In addition, investors in our Funds, particularly in the first years, can expect that a majority of their 1099 income will be a return of capital as opposed to dividend income due to the nature of the Funds' income. This allocation should provide a tax deferral opportunity to investors as well.
  • In order to concentrate our portfolios on MLPs, SteelPath chose not to seek a RIC tax election but instead chose to be taxed as a corporation. So, unlike most mutual funds, the Funds are not treated as RICs for tax purposes and are therefore obligated to pay federal and applicable state income taxes on taxable income.
  • Those familiar with the sector will note that this is the same tax treatment used by closed-end funds that focus on MLPs. While the tax treatment afforded our Funds, and the MLP-focused closed-end funds, is not as efficient as that afforded traditional RICs, it is a necessary condition to provide investors with concentrated exposure to the MLP asset class and to eliminate the K-1 and UBTI tax burden for investors.
open

September 2010

Fund Flows & Valuation

Brian Watson

Fund_Flows_&_Valuation
  • MLPs have raised $9.3 billion in equity year-to-date. This supply of units dwarfs the $3 billion plus raised by recently launched investment funds. Given the size of these recent pooled investment vehicles, we do not believe their associated fund flows have been enough to overwhelm the sector.
  • Admittedly, at the beginning of the year, we had anticipated mid-single digit price gains for 2010 instead of the 11.0% thus far recorded. However, we do not believe this year's outperformance is wholly without merit.
  • 2011 and beyond distribution growth visibility has been aided by the $20 billion in acquisitions that have been announced year-to-date and the similarly impressive increase to planned green-field projects.
  • Looking at the five-year period prior to the financial crisis (using June 2008 as a starting point for the crisis), yields averaged 6.6%. From this perspective, today's 6.9% yield appears fairly in line with history as well.
  • For this same pre-financial crisis period, the spread between MLP yields and the 10-year Treasury yield averaged 2.1%. Today, this spread stands at 4.3%. Obviously today's spread reflects a 10-year Treasury yield that is at an all time low but the difference to the historical average is substantial and certainly allows for a good deal of yield compression before reaching this historical average.
open

June 2010

Gulf Oil Spill Impact

Stuart Cartner

Gulf_Oil_Spill_Impact
  • MLPs primarily own onshore midstream assets, such as pipelines, terminals, storage facilities and natural gas processing and treating plants. Therefore, the sector overall has very little exposure to Gulf of Mexico oil production or natural gas production. However, a handful of MLPs do own offshore gathering assets (which gather natural gas or oil production from offshore fields) or assets which transport or process natural gas that originated offshore.
  • Of the seventy plus MLPs in the space, only five have margin of any consequence exposed to Gulf production. Additionally, most of this exposure is related to natural gas production as opposed to oil production. If you'll recall, the announced drilling ban applies to deepwater drilling and only 40% of Gulf natural gas production comes from deep or ultra deepwater fields.
  • Assuming the ban is lifted after 6 months, the impact on those few MLPs with exposure to deepwater production should be very minimal as volume declines for impacted assets will also be minimal. Estimates vary, but it appears most analysts estimate the ban should only result in an approximate 4% reduction in offshore gas volumes in 2010.
  • Further, given the inelasticity of energy demand, basic economic theory suggests such new regulation is likely to result simply in higher prices rather than substantially change the volume of supply and demand. Given that infrastructure MLPs primarily earn a fee per volume transported or earn fixed amounts for capacity reserved, these businesses should experience limited impact in such a scenario.
open

May 2010

Market Turbulence

Maria Halmo

Market_Turbulence
  • Over the past month the broader markets as well as MLP stocks have exhibited unusual volatility and turbulence.
  • For the May 2010 installment of the Analyst Insight, Associate Maria Halmo addresses Bryce's questions on the results of SteelPath's review of historical performance data and explains why MLPs have performed well in tough markets.
  • Over the past decade, MLPs have shown a relatively weak 0.24 correlation to the S&P 500. Although MLPs continued to outperform the market in May, correlation jumped to 0.94. While not common, a short period of increased correlation between MLPs and the broader market is also not unusual, especially during market shocks such as the one we recently experienced.
  • During the sharp drops experienced in June and September of 2002, the correlation rose to 0.81. In the period surrounding October of 2008, when the S&P 500 lost 35%, MLPs showed a 0.50 correlation.
  • Over the past 10-years, in the twelve months following a ten percent drop in the S&P500, MLPs have returned, on average, over forty percent to investors, on a total return basis.
open

April 2010

Natural Gas Infrastructure

Gabriel Hammond

Natural_Gas_Infrastructure
  • Even in a scenario where natural gas does not capture significant market share from other fuels, there will still be demand-focused infrastructure needs due to regional population growth and supply shifts.
  • The EIA forecasts shale gas production will increase 40% over the next 5 years while conventional gas production will decrease 17.5%.
  • Infrastructure necessary to accommodate this shift in supply includes everything from gathering pipelines, treating facilities, processing plants and compression to long-haul transmission pipelines and storage.
  • The associated capital expenditures are expected to total between $133 billion to $210 billion over the next 20 years. For some context, the entire market capitalization of the energy MLP space is approximately $180 billion.
open

March 2010

Interest Rates and MLPs

Stuart Cartner

Interest_Rates_and_MLPs
  • The 10-year Treasury rate spent the better part of the past two years below 4.0% and the Fed Funds rate has been at a historic 0.25% low for a year in an attempt to stimulate the economy.
  • Over the past months the economy appears to be doing better and investors have been curious about what impact higher interest rates might have on the master limited partnership (MLP) space.
  • For the March 2010 Analyst Perspective, Portfolio Manager Stuart Cartner addresses Bryce's questions on interest rates and the MLP space.
open

February 2010

Are Distributions Safe?

Brian Watson

Are_Distributions_Safe?
  • In January, two master limited partnerships (MLPs), both involved in shipping, cut their distributions. Many investors were surprised by the cuts since the economy appears to be rebounding and have been asking about the safety of distributions.
  • For the February 2010 installment of the Analyst Perspective, Director of Research Brian Watson addresses Bryce's questions on MLP distribution safety.
open

January 2010

Natural Gas and MLPs

Brian Watson

Natural_Gas_and_MLPs
  • Over the past month natural gas prices have rallied sharply after spending most of the year falling. Given all of this volatility many investors are curious what impact natural gas prices have on master limited partnerships (MLPs).
  • For the January 2010 installment of the Analyst Perspective, Director of Research Brian Watson addresses Bryce's questions on natural gas prices and how natural gas fundamentals relate to the MLP space.
open

December 2009

Equity Offerings Have Picked Up

Brian Watson

Equity_Offerings_Have_Picked_Up
  • Over the past several months, master limited partnerships (MLPs) have been issuing equity at a pace not seen in a year, or since the financial crisis.
  • For the December 2009 installment of the Analyst Perspective, Director of Research Brian Watson addresses Bryce's questions on this capital market activity and what it means.
open

October 2009

Institutional Investor Sentiment

Erin Moyer

Institutional_Investor_Sentiment
  • The primary investor conference in the Master Limited Partnership (MLP) space is the NAPTP's (National Association of Publicly Traded Partnerships) MLP Investor Conference.
  • This year, the conference was held September 16 & 17 in Greenwich, Connecticut. SteelPath was a corporate sponsor of the event and, of course, sent its research staff to sit down with management teams. Many of SteelPath's investors have inquired about our take of the market sentiment of the other institutional investors at the conference.
  • For the October 2009 Analyst Perspective, Vice President Erin Moyer addresses Bryce's questions on the general mood and outlook of investors and management teams at the conference.

*The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships that provides investors with an unbiased, comprehensive benchmark for this emerging asset class. The index, which is calculated using a float-adjusted, capitalization-weighted methodology, is disseminated real-time on a price-return basis (NYSE: AMZ). It is not possible to invest directly in an index. Performance information provided for the Alerian MLP Index is not indicative of the performance of the SteelPath Funds. The SteelPath Funds were each incepted on March 31, 2010, and as a result have a more limited performance history than the Alerian MLP Index.

**Yield information discussed above is historical and relates to MLPs generally. Such yield information does not represent the performance of SteelPath MLP Funds. Past performance does not guarantee future results.