U.S. Markets open in 4 hrs 17 mins

MLP ETFs Capture U.S. Energy Expansion Toward Self-Sufficiency


The U.S. is pumping out more black gold than ever as shale oil and gas production accelerates. As the country moves toward energy self-sufficiency, investors can take a look at master limited partnership exchange traded funds to capitalize on oil boom.

According to BP Plc (BP), the U.S., the world’s largest producer of oil as of 2013, will be able to meet all its energy needs on its own by 2035 due to increased shale oil and gas projects, along with slowing demand, reports Brian Swint for Bloomberg.

Over the next two decades, Asia and Europe will be the main oil importers, with global energy demand to rise 41% by 2035 from 2012, slower than the 52% gain over the past two decades.

“Both oil and gas import concentration will increase massively in Asia and Europe,” BP Chief Economist Christof Ruehl said in the article. “About 80 percent of all traded oil will go into Asia.”

Meanwhile, investors can capitalize on the U.S. oil production boom through master limited partnerships.

MLPs are businesses that engage in energy infrastructure activities, including the processing, storage and transportation of minerals and natural resources. While MLPs are associated with the energy sector, they have a low correlation to energy prices, along with the broader equities markets, as the assets act like a toll-road in the nation’s energy infrastructure. Consequently, MLPs are ideally situated as the U.S. pushes around more volume.

MLP-related ETFs, like the Alerian MP ETF (AMLP) , are structured as C-Corporations. Due to the C-Corp structure, they must pay corporate income tax on distributions before passing them to investors. Consequently, MLP ETFs may incur higher fees that would cut into overall performance, leading to an underperformance compared to the underlying benchmark.

On the other hand, some non-C-corporation MLP ETF have reduced 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. Some examples include the Global X MLP & Energy Infrastructure ETF (MLPX) , Alerian Energy Infrastructure ETF (ENFR) and actively managed First Trust North American Energy Infrastructure Fund (EMLP) . [Capture the Boom in U.S. Oil with MLP ETFs]

Additionally, the JPMorgan Alerian MLP Index ETN (AMJ) is unsecured debt instrument that replicates the return of the MLP index. The ETN vehicle is not subject to the double-taxation effects associated with a C-Corporation. ETNs, though, are subject to credit risk of the underwriting bank or issuer.

For more information on oil, visit our oil category.

Max Chen contributed to this article.