Midstream infrastructure has emerged as a hot topic in the oil and gas space. A common theme heard at E&P investor conferences and recent earnings calls is new supply is being produced from the shale basins at a faster rate than the amount of midstream infrastructure available to collect, process and transport it to market.
While E&Ps are focused on finding and exploiting hydrocarbon deposits and building large asset bases of producing mineral acreage and reserves, master limited partnerships (MLPs) have become a popular route on the midstream side—companies that acquire, build and operate the assets that take oil and gas from wellhead to end user.
Midstream assets include natural gas pipelines, gas processing facilities, fractionation plants to extract ethane, propane, butane, iso-butane and natural gasoline from natural gas, storage facilities, NGL pipelines, crude oil trucks and barges and oil pipelines, and refined product pipelines. But MLPs have been formed for E&P assets, coal producers and shipping as well.
In its in-depth coverage of the midstream industry, Morgan Stanley’s 2013 “Midstream Energy MLPs Primer 3.0” describes the strength of energy MLPs:
“The MLP structure, having reshaped the energy landscape in the past several years, will increasingly be used in the U.S. to own critical energy infrastructure assets. We believe the institutionalization of the industry (p. 21) along with at least a 3-year investment capex backlog (p.45), are secular tailwinds that will support stock (unit) prices.”
MLP analysts point to a record of stable distribution yields, distribution growth, higher yields, higher total return, better risk/return ratio than equities, bonds or commodities, stable cash flow (and resulting distributions) tied to long term contracts (shipping, pipelines, terminals) and/or fee-based business models (pipelines, terminals), inflation hedge aspects, and others.
EnerCom’s Oil & Gas 360® will take a weekly look at the universe of MLPs that hold and operate the industry’s midstream businesses as well as some that are associated with other energy-related assets such as proppants, LNG ships and oilfield service equipment. Oil & Gas 360® is preparing a new weekly distribution called “MLP Scorecard” in which we will take a look at the major players in the MLP universe and follow key metrics for the companies operating in the space.
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