Tapping into North American Energy Infrastructure for Income
December 16, 2019
Read Time 9 MIN
Income investors have become accustomed to expanding their search for yield beyond traditional fixed income securities for over a decade. Many have looked to alternative strategies such as preferred securities or dividend stocks to inject much desired income and diversification into their portfolios. One additional area that should not be overlooked lies within the growing North American energy complex.
The energy sector faced headwinds for much of 2019, including concerns over slowing global growth and seemingly never ending U.S.-China trade tensions. These concerns weighed on near-term energy demand outlook, and in turn, on energy companies, causing disappointing performance for the sector this year. Despite these headwinds, U.S. energy production and export growth remain strong. In a recent update, the Energy Information Administration increased their U.S. crude oil production forecast for the remainder of 2019 and 2020.1
Master Limited Partnerships (MLPs)2 and the broader category of energy infrastructure companies own the pipelines, storage tanks and processing facilities that help bring energy from the wellhead to end consumers. These companies feature an attractive yield and offer investors the potential to enhance and diversify exposure to alternative income sources. They also stand to be direct beneficiaries of the growing U.S. energy landscape.
Energy Infrastructure: High Income Potential
Data as of 9/30/2019
Source: FactSet. See definitions and disclosures at bottom of page.
Energy Infrastructure Positioned for Growth
The United States has experienced an energy renaissance over the past decade. Technological advancements in drilling techniques facilitated the profitable extraction of large reserves of crude oil and natural gas trapped in American shale rock. The U.S. became the world’s largest oil producer in 20183 and is projected to become a consistent net energy exporter in 20204. This significant growth in North American oil and gas production has increased the need for supporting infrastructure, including new pipelines connecting producing regions with demand centers and the coast for export. A 2018 study by the Interstate Natural Gas Association of America estimated that an investment of $521 billion in midstream energy infrastructure is needed in the U.S. and Canada by 2035.5
Additionally, energy infrastructure companies generally do not have direct exposure to commodity prices. Instead, they focus on the more stable business lines within the energy complex.6 Their businesses function primarily on a set fee per volume or fee for service basis and are historically driven by volumes rather than spot prices. The segment also generates diverse revenue streams through multiple sources including transportation, processing and storage for many upstream producers. This defensive, fee-based business model has helped insulate energy infrastructure companies from volatile energy prices and positioned them to potentially benefit broadly from growing energy production and exports.
Monthly U.S. Crude Oil Production and Exports
January 2010 – August 2019
Source: U.S. Energy Information Administration.
Tax-Loss Selling Opportunity
With equity markets trading near all-time highs and bond prices rallying off the decline of U.S. Treasury yields, most major indices have delivered positive total returns in 2019, limiting the potential for tax-loss selling. However, there are still a few categories, such as MLPs or other areas within the U.S. energy sector, which faced headwinds this year and may have harvestable losses for investors, depending on their cost basis. Investors with unrealized losses in these areas may be able to deploy a tax-loss selling strategy to improve their portfolio’s tax efficiency. A tax swap strategy—involving the sale of one fund with losses, potentially a pure MLP fund, and the simultaneous purchase of another one with similar exposure, such as a more broad energy infrastructure fund—could create a recognized tax loss to offset realized or future capital gains while still allowing the investor to maintain market exposure.
Comprehensive Access to North American Energy Infrastructure
Direct investment in energy infrastructure, including MLPs, has historically been a complex matter. The VanEck Vectors®Energy Income ETF (EINC) provides comprehensive access to North American energy infrastructure companies without K-1 tax reporting, fund-level taxation, leverage or debt counterparty risk. EINC seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS®North America Energy Infrastructure Index (MVEINC), which is intended to track the overall performance of North American companies involved in the midstream energy segment. This includes MLPs and corporations involved in oil and gas storage and transportation.
1Source: U.S. Energy Information Administration, November 21, 2019
2Master Limited Partnerships (MLPs) are business ventures in the form of publicly traded limited partnerships.
3Source: U.S. Energy Information Administration, September 12, 2018
4Source: U.S. Energy Information Administration, January 29, 2019
5Source: North America Midstream Infrastructure through 2035
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