Oil prices are rebounding, with the fundamental outlook improving. As more return to the energy play, investors can consider a broad energy infrastructure exchange traded fund.
On the recent webcast, High Quality MLP Strategy: Understanding the Benefits of Pipeline ETF , Brian Sulley, Vice President of Tortoise Capital Advisors, projects that oil demand will grow in 2016 and 2017 while production declines in the U.S. and Organization of Petroleum Exporting Countries in the future will help diminish the global supply glut.
“We are currently on pace to see global oil supply and demand move into balance during the second half of 2016,” Sulley said.
In a survey of polled advisors on the webcast, 68% of respondents believe the energy sector will perform over the second half of the year, compared to 8% who believe the sector will weaken and 24% who say it will remain flat.
As energy demand grows and production expands across North America, we will need to lay down additional pipelines to accommodate the growth. For instance, there is a prjoect backlog of about $120 billion in additional pipeline infrastructure.
“With so much supply coming from parts o the country that don’t have a legacy of energy infrastructure, there is continued need for additional pipeline build out,” Sulley said.
While the energy infrastructure space may be associated with crude oil, pipeline companies have been somewhat insulated from volatility in the commodities market. Sulley pointed out that pipeline MLPs saw cash flows as measured by EBITDA increase about 20% in 2015 and nearly all of them maintained or grew dividends.
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Additionally, the various energy pipelines have capitalized on their diversity. For instance, natural gas pipelines benefit from rising natgas production, along with the structure of the contracts that help mitigate cash flow risks. Refined products benefit from lower prices while demand for gasoline and other refined fuels rise. Crude oil pipelines benefit from the volume of oil being transported, but a dip in shale oil production may pressure this segment.
ETF investors interested in gaining exposure to the growing energy infrastructure space can take a look at the Tortoise North American Pipeline Fund (TPYP) . Matthew Weglarz, Portfolio Manager and Vice President at Tortoise Index Solutions, explained that TPYP provides broad access to the entirety of North American pipelines, including pipeline corps, master limited partnerships and MLP affiliates, which help diminish exposure to commodity price sensitivity by focusing on midstream energy names.
Weglarz also noted that when it comes to fund investments in the MLP space, the structure matters. Specifically, TPYP is structured as a regulated investment company, as opposed to a C-corporation. MLP ETFs structured as a C corp. are required to pay corporate income tax on distributions before the distributions are passed through to investors, which may cause wider tracking errors compared to the performance of the underlying MLPs. On the other hand, TPYP and other RICs limit holdings to 25% MLPs.
“RICs are more tax efficient,” Weglarz said.
TPYP includes a 20% tilt toward MLPs, 38% MLP affiliates or owners and 42% other pipelines. Sub-sector weights include natural gas pipelines 48%, crude oil pipelines 20%, local gas distribution companies 18%, gather & processing 10% and refined product pipelines 4%.
For more information on master limited partnerships, visit our MLPs category .
Financial advisors who are interested in learning more about energy infrastructure can watch the webcast here on demand .