Avoid Commodity Price Volatility with Midstream MLPs: A Wall Street Transcript Interview with Gregory A. Reid, President and CEO of the Master Limited Partnership Business for Salient Partners

Wall Street Transcript

67 WALL STREET, New York - May 20, 2014 - The Wall Street Transcript has just published its Oil & Gas: Master Limited Partnerships Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Increasing Demand for Midstream Assets - U.S. Energy Infrastructure Build Out - Emerging Shale Plays - Outlook for Natural Gas Liquids - Oil and Gas Investing - Shale Production Growth

Companies include: Anadarko Petroleum Corp. (APC), Targa Resources Partners LP (NGLS), Williams Companies, Inc. (WMB), ONEOK Inc. (OKE) and many others.

In the following excerpt from the Oil & Gas: Master Limited Partnerships Report, an experienced MLP asset manager discusses his firm's investing methodology and the outlook for the sector for investors:

TWST: What kinds of returns are you expecting this year compared to last year, which was a good year for this sector overall?

Mr. Reid: Yes, it really was. I think it's always tough to talk about projected returns. I'll try to frame it in history a little bit. Over the last eight or so years the index has created returns in the midteens, in the 15% to 16% range. Arguably it was at a very low base, just getting started in 2006, so those are higher than what we would expect them to be going forward.

If you look at the last eight years, what we have seen is that the yield eight years ago was approximately 7% in the AMZ Index, and we experienced something close to 7.5% dividend growth. So it's not terribly shocking that 7% yield and 7.5% growth drove returns in the midteens. I think over a rolling three- to five-year period, I would look for returns to be driven by the yield plus the growth rate.

TWST: What themes or trends are you seeing in the market today?

Mr. Reid: We think one big theme is the moving of assets from a traditional C-Corp structure into an MLP flow-through structure. MLPs are publicly traded partnerships, which means they are not paying corporate taxes, so they are a more efficient way for companies to own midstream assets. And so a big theme is really unlocking the value from traditional corporations that are set up in a 35% tax bracket structure and moving those assets out of a corporate structure and into a partnership structure.

There's a lot of potential value that's trapped inside corporations today that we think, frankly, belongs better in an MLP structure. There is a lot of growth potential coming from those kinds of companies, whether it's Anadarko (APC) unlocking value out of their exploration and production company, or some of the refining companies like Marathon (MPC) and Phillips 66 (PSX) that have recently taken their MLPs public, and their goal is to drop down or sell most of their midstream assets into their MLP structures over the next three to five years. We believe that's a huge source of value and creates a lot of potential growth.

If you look at the stocks of Marathon, Phillips 66 and Valero (VLP), you will see what I mean. They are up significantly from their IPO a year and a half ago or less, and in our view that's a good sign of unlocking value from corporate structures.

One thing I want to add on our investment process that you asked about earlier is, we are very much focused on the midstream segment of the MLP space. That's the majority of the companies. By midstream I mean in between the producers that are exploration and production companies and the downstream businesses like refineries or end users. We want to be in the middle, because that typically is a fee-based business that's more of a toll-road business model.

We really don't want to be heavily exposed, or really exposed at all, to commodity prices and to the volatility that you see in commodities...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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