Energy supply growth
The global energy market is experiencing excess energy supplies. The supply glut is mainly due to:
- record US production—a result of horizontal drilling and hydraulic fracturing techniques
- increased output by OPEC (Organization of the Petroleum Exporting Countries) to win back their lost market share
How do MLPs benefit?
The above chart shows that natural gas is expected to dominate US energy production in terms of BTU (British thermal units) in the future. Overall, the energy production has been increasing since the US energy shale boom. The trend is expected to continue in the near future. Midstream companies dominate the MLP (master limited partnership) space. They have huge growth potential—considering the massive energy infrastructure required to support the rising supply of commodities.
The INGAA (Interstate Natural Gas Association of America) released a study in March 2014. It tripled its estimated North American midstream infrastructure expenditure outlook from its study in 2011. The INGAA study claims that over $640 billion, or ~$29 billion per year, in capital expenditure would be required by 2035 to support the huge supply growth.
According to Alerian—the largest MLP-focused index company—the MLP space is expected to return 10%–12% annually over the long run. This return assumes no meaningful movements in valuation from current levels. It’s comprised of a 6% yield and distribution growth of 4%–6% per year. The projected growth numbers are based on the incremental construction of new assets to support the US energy boom.
The Alerian MLP ETF (AMLP) tracks the Alerian MLP Index. AMLP holds some well-known MLPs including Enterprise Products Partners (EPD), Magellan Midstream Partners (MMP), Williams Partners LP (WPZ), and MarkWest Energy Partners LP (MWE). These four holdings account for ~32.8% of the total portfolio.