Energy sector and master limited partnership-related exchange traded funds are rallying Tuesday after Canada’s Enbridge (ENB) announced it would acquire Spectra Energy (SE) for $28 billion to establish the largest infrastructure company in North America.
Enbridge said it would buy Spectra Energy in an all-stock deal valued at about $28 billion, Reuters reports.
The deal is expected to go through without a hitch. Bruce McDonald, an antitrust expert with Jones Day law firm, said there is no serious antitrust problems as the companies’ networks have “limited overlap.”
Enbridge’s pipelines send Canadian oil sands to refiners on the U.S. Gulf Coast, whereas Spectra’s network transfers natural gas to the U.S. East Coast.
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ENB shares rose 7.0% Tuesday while SE shares surged 15.9%.
Meanwhile, ETFs that track master limited partnerships and energy infrastructure-focused companies rallied on the acquisition news.
Leading the charge on Tuesday, the Tortoise North American Pipeline Fund (TPYP) gained 2.7%, Global X MLP & Energy Infrastructure ETF (MLPX) rose 3.3% and Alerian Energy Infrastructure ETF (ENFR) added 2.0%
These energy infrastructure-related ETFs are a type of hybrid MLP ETFs.
Most MLP ETFs are structured as C corporations. Since MLP ETFs are structured as a C corp., these corporations are also required to pay corporate income tax on distributions before the distributions are passed through to investors – MLP ETFs are required to pay corporate taxes or a 35% federal rate on returns.
MLP fund investors are also taxed on the dividends and capital-gains distributions. Consequently, MLP ETF investors are double-taxed. While it is not an explicit cost, ETF investors would see the results of the corporate tax liabilities through wider tracking errors compared to the performance of the underlying MLPs.
Alternatively, investors who want to stick with ETFs but are wary of the C-corporation structure can consider hybrid MLP ETFs, or non-C-corporation MLP ETFs, which have reduced direct MLP holdings to under 25% to meet regulatory rules and hold other energy infrastructure stock through subsidiaries as a way to avoid the double-taxation issue.
For instance, TPYP includes a 20% tilt toward MLPs, 39% MLP affiliates or owners and 41% other MLP affiliates. Sub-sector weights include natural gas pipelines 48%, crude oil pipelines 21%, local gas distribution companies 16%, gather & processing 11% and refined product pipelines 4%. Additionally, the ETF includes a 8.1% tilt toward SE and 7.3% to ENB.
MLPX includes a 23.6% tilt toward limited partnerships, along with 58.8% in MLP affiliates and 17.7% in energy infrastructure corporations. Top holdings include ENB 8.9% and SE 8.1%.
ENFR includes 25.4% U.S. MLPs, along with 25.1% U.S. energy infrastructure, 24.4% Canadian energy infrastructure and 25.0% U.S. general partners. The ETF’s top holdings include SE 5.0% and ENB 4.5%.
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Global X MLP & Energy Infrastructure ETF