Wednesday, June 3, 2015
When folks think about investing in the U.S. energy sector, they usually focus on oil and gas exploration and production (E&P) companies.
These companies are responsible for the massive amounts of oil and gas that are being produced in the U.S. right now. Until the recent oil-price collapse, they were big beneficiaries of America's energy boom. And they will continue to benefit when oil prices eventually move higher again.
But right now, there's another sector benefiting from all this oil and gas. And it has outperformed E&P companies over the past six years...
As regular Growth Stock Wire readers know, new drilling techniques have allowed U.S. oil and gas production to surge in recent years. Annual U.S. crude oil production is up more than 70% since 2008. Annual gas production is up 30% over the same period.
With this surge in production, the need for infrastructure to transport oil and gas has grown. An ample supply of oil and gas is useless if you have no way to transport it to refiners and customers.
That's why we've seen hundreds of miles of pipelines built to transport oil and gas over the past few years. For example, my colleague Matt Badiali recently told you about the new pipeline system bringing oil all the way from Canada to Texas.
One of the sectors that has benefited the most from America's infrastructure buildout over the past few years is master limited partnerships (MLPs). Most MLPs own and operate midstream assets (assets used to process, store, and transport oil and gas – like pipelines and storage tanks). These assets connect the producer with the refiner or customer.
As you can see in the chart below, the increased need for transporting oil and gas has helped push MLPs higher. Since 2009, the benchmark Alerian MLP Index has returned more than 140%. Meanwhile, the Energy Select Sector SPDR Fund (XLE), which holds all of the energy stocks in the S&P 500, has returned just a bit more than half that over the same period.
And it's likely this outperformance will continue.
As we've shown in these pages before, we expect U.S. oil and gas production to keep soaring. To keep up with this massive amount of oil and gas, the U.S. energy infrastructure buildout will need to continue.
For example, midstream MLP Plains All American Pipeline has said it will spend $2.15 billion this year to grow its asset base. This will be the most it has ever spent on organic growth. The company says the investment is needed "to address long-term demand for energy infrastructure as the resource base is developed over time."
Altogether, investment bank Jefferies estimates the future annual funding requirement for this buildout will be roughly $80 billion to $90 billion.
That means a massive amount of money is heading toward midstream MLP companies.
But this isn't the only reason I expect these companies to outperform energy E&P firms...
You see, MLP companies are more attractive to investors than regular energy stocks right now – thanks to their large yields. Whatever an MLP doesn't need for current operations or to maintain assets, it passes on to its individual investors – or partners – as distributions. (Distributions for MLPs are similar to dividends for stocks.)
The Alerian MLP Index currently yields around a solid 6%. For comparison, the S&P 500 yields just 1.9%. And many MLPs' distributions are growing as the amount of product they ship and store grows.
Most MLPs also have minimal exposure to oil and gas prices. They collect the majority of their revenues from fee-based contracts. In short, they just collect fees from processing, transporting, and storing oil and gas. This makes their distributions more reliable. And it makes them an attractive investment with low oil prices right now.
To sum up, MLPs will be one of the biggest beneficiaries from America's ongoing surge in oil and gas production – even with low oil and gas prices. They also pay big yields. I recommend looking into the sector today.
Please note, though, that investing in an MLP is not the same as buying a stock. So before investing, I recommend talking to your accountant.
Thanks to the big bear market in natural resources like oil, resource stocks are "some of the best income investments you can find today," Matt Badiali writes. Get all the details here.
Brian says setting yourself up to profit from natural resources starts with one simple rule... respecting the trend. Learn how to start using the trend to profit – and avoid losses – in resource investing right here.
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