As the U.S. pumps out more oil, the greater need for energy infrastructure will be a boon master limited partnerships and related exchange traded funds.
According to a recent Interstate Natural Gas Association of America study, North America will require $30 billion a year in investments through 2035, which some say may be conservative, to accommodate the shale oil revolution, reports Javier E. David for CNBC.
The natural gas association calculates that between Canada and U.S. alternative oil plays, at least $2.5 billion will be required per year through 2035 to expand the natural gas infrastructure and another $12.4 billion for crude oil pipelines. [Capture the Boom in U.S. Oil with MLP ETFs]
“You have these newer shale developments that are completely underserved by legacy pipeline capacity,” Seth Appel, co-head of energy investment banking at MLV & Co., said in the article. “Over 70 percent of the crude produced in the Bakken [North Dakota] was transported out of region by rail, due to insufficient pipeline capacity.”
MLPs are seeing their fair share of growth as they expand from a cumulative market capitalization of less than $50 billion in 2003 to over $450 billion, Adam Karpf, a portfolio manager for MLP strategies at Atlantic Trust, said.
The the rise of shale oil is producing “rapid growth in the industry,” Karpf said in the article. “MLPs are better able to handle capital spending requirements for U.S. industry. It’s no longer a sleepy industry.”
Investors can access the MLP space through exchange traded notes or ETFs, like the UBS ETRACS Alerian MLP Infrastructure ETN (NYSEArca: MLPI) and the Alerian MP ETF (NYSEArca: AMLP). As an 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. [MLP ETFs Try to Address Tax Headaches]
Newer MLP-related ETFs limit MLP holdings to 25% of the total portfolio. For instance, First Trust introduced the actively managed First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP), the first RIC-compliant MLP product, limits MLP holdings to 25% and includes other energy infrastructure firms with similar characteristics to MLPs. Additionally, the newer Global X MLP & Energy Infrastructure ETF (NYSEArca: MLPX) and he Alerian Energy Infrastructure ETF (NYSEArca: ENFR) to also limit holdings of MLPs. [How MLP ETF Structures Affect Yields and Returns]
For more information on master limited partnerships, visit our MLPs category.
Max Chen contributed to this article.