One thing the energy production boom means – besides the wild, now-14-month-long crash in oil and gas prices – is that pipelines and energy infrastructure are going to remain in high demand. As American oil & gas companies continue producing – as they've shown they can & will do –, those producers will have to continue using the services of the pipeline, transportation, and storage facility owners.
The term "MLP" can mean many things
Many investors equate "pipelines" and "energy infrastructure" with Master Limited Partnerships (MLPs) like Enterprise Product Partners (EPD), Energy Transfer Partners (ETP), Williams Partners LP (WPZ), Enbridge Energy Partners (EEP), Magellan Midstream Partners LP (MMP), etc.
Yet not all MLPs are pure pipeline plays, nor are all pipeline companies are structured as MLPs!
First, many MLPs aren't "midstream" energy companies at all, but rather, are involved in "upstream" activities like exploration and production (e&p). As a result, these "upstream" MLPs' distributions depend on production – which, in turn, is highly affected by oil & gas prices.
On the other hand, many pipeline companies have simply chosen to structure their company as an LLC or C-corporation rather than as an MLP. Some are owned by or affiliated with MLPs, and some are not. Kinder Morgan (KMI) famously ditched its MLP structure last year, but remains very much a pipeline, transportation & storage company.
Yorkville MLP ETF has lots of "upstream" MLPs
To illustrate that many MLPs are in non-pipeline businesses, consider the popular Yorkville High-Income MLP ETF (YMLP). YMLP's current distribution yield is about 16%, according to Morningstar. Yet the fund's total returns for the 12 months ending 8/28/15 have been a 48.5% loss. There are some lessons here, incidentally. First, anytime you select a fund, remember it's not all about yield. And second, always make sure you know what you’re getting.
Despite investing 100% in MLPs, YMLP is certainly not a pure pipelines play. In fact, one of YMLP’s top 10 holdings is Alliance Resource Partners LP (ARLP), a coal producer. So not only is ARLP not primarily in the energy transportation or infrastructure business, it’s not even in the oil & gas business! Which again, may be fine, as long as you know what you’re getting. YMLP is an MLP fund, to be sure, but it’s certainly not a “midstream” or “pipelines” fund. In fact, the fund has not one, but two coal production companies in its top 20 holdings (comprising about 8.5% of the fund).
In addition, YMLP’s #11 and #17 holdings are pure "upstream" exploration & production (e&p) companies. EV Energy Partners LP (EVEP) and Atlas Resource Partners (ARP) happen to be structured as MLPs, but make no mistake: they're not in the "midstream" business at all, the way many investors think MLPs operate. As "e&p" plays, EVEP's and ARP's distributions are highly dependent on the companies' ability to produce and sell oil & gas at prevailing prices.
There's nothing necessarily wrong with this, nor is Yorkville intentionally misleading anyone. The nature of Yorkville's holdings is plainly disclosed and presented on their website, for those who take the time to go to the site. You have to do your homework. Know what you own and why you own it. I believe most people invest in MLPs and MLP funds for the relatively steady income that "midstream" pipeline companies can generate; not in hopes that a handful of oil and coal producers will be profitable enough to deliver distributions. With the crash in oil, gas, and coal prices over the last 14 months, YMLP’s shareholders have been absolutely crushed. (Oh, by the way, holding #19 is neither an "upstream" nor a "midstream" company, but rather is a chemical supplier to drillers… which happens to be structured as an MLP rather than as a corporation).
Bottom line, investors need simply to understand that the term "MLP" refers to a company's structure and is not interchangeable with being in the "pipeline" or "energy infrastructure" industry.
Funds: MLP funds vs. pipeline funds
The largest MLP fund is fraught with problems. The Alerian MLP ETF (AMLP) is 100% MLPs, like YMLP; yet the fund itself is structured as a C-corporation… meaning the fund's profits are taxed at C-corp rates before the investor ever sees any return. Ever wonder why AMLP has such a high expense ratio (currently listed at 5.43%)? Most of those "expenses" actually go to cover tax liabilities. Over the past 5 years, through 8/31/15, AMLP has lagged the Alerian MLP index it’s designed to track, by a score of 9.78% to 5.80%, annualized. Again, the lagging performance shows the effect of taxes.
First Trust Advisors and Tortoise Funds offer alternatives; namely, First Trust North American Energy Infrastructure Fund (EMLP) and the Tortoise North American Pipeline Fund (TPYP), respectively.
Rather than registering their funds as C-corporations like Alerian did (thus subjecting their investors to double-taxation), EMLP and TPYP are Registered Investment Companies (RICs). As such, EMLP and TPYP must never have more than 25% of their assets invested in companies that happen to be structured as MLPs. The 2 RICs invest, then, in 20-25% MLPs, and 75-80% in other companies that operate in energy pipelines, transportation, storage, and infrastructure. There are many such companies, Kinder Morgan serving as just one example.
EMLP is the older of the two funds, is actively managed, and typically contains substantial exposure to select utilities.
TPYP is brand new, has zero utilities exposure, and is designed to "passively" track the performance of the Tortoise North American Pipeline index.
TPYP has a slightly lower expense ratio but is anticipated to have a slightly lower dividend yield. Both are managed for a "growth and income" objective, and thus may offer upside, if only from a recovery to prior levels.
I think you'll find these 2 ETFs interesting enough that, since this post is already so long, I’ll cover them in greater depth in my next article.
Best,
Adam Feik
INO.com Contributor - Energies
Disclosure: At the time of post publication, this contributor did not own any securities mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
