67 WALL STREET, New York - January 31, 2012 - The Wall Street Transcript has just published its Investing in Master Limited Partnerships and Other Investing Strategies Report offering a timely review of the market climate to serious investors and industry executives. This Investing in Master Limited Partnerships and Other Investing Strategies Report feature contains expert industry commentary through in-depth interviews with Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Investing in Energy in the Current Market - An Upbeat Picture of MLPs - Companies with Low or No Debt - Global Economic Themes and Trends
Companies include: General Motors (GM); Plains All American (PAA); American Airlines (AAMRQ.PK) and many more.
In the following brief excerpt from the Investing in Master Limited Partnerships and Other Investing Strategies Report, interviewees discuss the outlook for their portfolio focus, investment philosophy, top picks and outlook on the current market climate.
Brian Watson joined SteelPath Fund Advisors in 2009 and is the firm's Director of Research and a Member of the investment committee. Prior to joining SteelPath, he was a Portfolio Manager at Swank Capital LLC, a Dallas, Texas-based investment firm. From 2002 to 2005, Mr. Watson covered the MLP and diversified energy sectors for RBC Capital Markets in the firm's equity research division. Prior to that, he worked for Prudential Capital Group helping to analyze, structure and invest in debt private placements issued primarily by companies involved in the energy industry, including MLPs. Mr. Watson earned a BBA from the University of Texas at Austin in 1996 and an MBA from the McCombs School of Business at the University of Texas at Austin in 2002. In addition, he has been a CFA Charterholder since 2000.
TWST: How have MLPs in general performed relatively over the last few years to the last few months? Have there been some hiccups over the back half of 2011?
Mr. Watson: Yes, the last few years, they've done really well. They bounced back incredibly strongly from the financial crisis. The basic story is that most of these guys, if you look at their income statements over the financial crisis, you wouldn't have known anything bad happened. So when the market settled, they went trading back to the same levels and have really rebounded nicely. 2011 wasn't too dissimilar from the broader market, really. They started off the year pretty strongly, and then oil prices went down, and then the broader economy. They really traded pretty sloppily through most of the summer. They ended the year on a high note. They rallied November, December and ended up beating the broader market by a little bit. If you look at the S&P, it was essentially flat and MLPs were up maybe 6.5%. So they outperformed the broader space a little bit, and then you throw in the distributions that investors were able to accumulate, and it was even a better total return in comparison.
TWST: What are some of your key holdings or some of your favorite stories at the moment?
Mr. Watson: Our biggest holding across the funds right now might be Buckeye Pipeline Partners (BPL). Buckeye is a refined products transporter primarily - moving gasoline, diesel and jet fuel from refining centers to consuming centers. It's a very attractive base business that benefits from annual tariff escalators and things like that. It's a very secure low-risk business with some growth to it. They bought, last year, the BORCO facility in the Gulf. It's a very large products terminal. They bought it for, I think, about 10.5 times, which is kind of a high multiple, but they were able to quickly find a number of expansion opportunities and margin growth opportunities that they can exploit. Over the next year or two, they should get that multiple down to the seven times range. We think if that happens, it would really change the market's perception of its ability to grow its distribution. So that's one of those names that we are looking for. It trades attractively on a valuation basis, and we think it's got an opportunity to have some multiples expansion as we go forward.
TWST: What's the biggest holding in the MLP income fund?
Mr. Watson: A firm called Regency Energy Partners (RGP). It's kind of a similar name, actually. It started its life as a processing company and has transitioned, to this point, to a longer-haul, fee-based gas-pipeline company. They are spending a pretty good amount of money right now on a natural gas liquids private company, and they are expanding natural gas liquid services to West Texas. It's a pretty large investment for them. As that goes into fruition, we think it has the opportunity to change investors' perception of its ability to grow. Very similar theme; it just offers a higher yield with an average, so it's a candidate for the income fund.
TWST: When you look at the holdings over the funds, are there certain trends within the energy infrastructure space that you're focused on this year than in the past?
Mr. Watson: I think generally speaking, as I mentioned for both of those entities, the primary growth prospects in the space are crude related, products related or natural gas liquids related. The world of natural gas probably offers a pretty steady volume growth for a number of years, but the ability to capture new business is a little bit less than it was a couple of years ago. So really it's the handling, the logistics related to crude oil and natural gas liquids that are really providing the growth opportunities today for most entities, and that's where we are focused.
TWST: The MLPs you like on that theme are not really tied into the price of natural gas?
Mr. Watson: Right. They're taking a fee for moving it. So if the price is really low, that's potentially good for demand. It might certainly make volume growth be better than people expect, and that could benefit them. The trick is, with this truly revolutionary change in natural gas dynamics and the fact that we are now in such a low-price environment has made it challenging for certain guys, so you've got to be careful. Those who are storage operators, particularly those who've built storage and leased it to marketers - whose whole job in life is to go out and buy natural gas on the spot market, lock in a profit on the futures market, normally during the winter months, and then have that storage there to physically back the trade - are facing not much margin in doing that any longer, because of the huge decrease in natural gas pricing.
So there are certain storage operators who are providing that storage for those marketers that are not making very much money any more. You've got to be careful with names like that. There are pipelines that we're servicing moving natural gas from a production basin to a city gate that, when they built the pipeline, probably was a great motive. Today there are a handful of pipelines we think that maybe aren't going to be able to recontract at a very good rate. So those are names you've got to really watch when that contract expires. More so than the world of natural liquids and crude oil, the natural gas world and some of those assets require you to do a little bit more homework.
TWST: Some people in the MLP world point to tax advantages and to using these as an inflation hedge. Is that a selling point for you?
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