Did you know that $153 billion (32%)¹ of the U.S. core midstream energy market capitalization (defined in a footnote below) is no longer in a Master Limited Partnership (MLP) structure, but in a C-Corp structure? Did you know that over the next twelve months that figure will likely rise to $181 billion, or 40% of the U.S. midstream universe, after additional simplification transactions occur?². The NYSE Pickens Core Midstream Index (NYPYPE) and its associated exchange-traded note (ETN) address this new reality in midstream investing.
Why does the structural shift of the midstream universe matter?
Midstream bellwethers like Kinder Morgan (KMI), Williams Companies (WMB), ONEOK (OKE), and Targa Resources (TRGP), which alone make up a combined 24% of the U.S. core midstream universe market cap³, are excluded from MLP-dedicated indices and products, given their C-Corp structure. KMI and WMB, for example, own and operate some of the most valuable “crown jewels” of midstream infrastructure that would be nearly impossible to replicate, including the Tennessee Gas Pipeline and Transco pipeline systems, respectively. Furthermore, KMI, WMB, OKE, and TRGP are forecasted to increase their dividends at attractive ~12% year-over-year growth rates, on average, in 2019 and 2020⁴.
Not all midstream companies are created equal.
If you chose to invest in MLPs because you were told that they were like “toll roads” with recurring cash flows, then you only heard (or listened to) part of the story. We view midstream companies on a spectrum of commodity price sensitivity by assets and contracts. Assets are either physically close to the point of oil & gas production (well-head gathering), in the middle (long-haul pipelines), or near the end user/point of consumption (terminals and storage assets). We describe the spectrum as “supply push” or “demand pull”.
Who are the customers and contract types from which midstream revenues are derived?
Supply-push customers are typically characterized by oil & gas producers; and demand-pull customers are companies like (i) refineries that demand crude oil to produce gasoline and other refined products, (ii) power/utility companies that demand natural gas for residential and commercial use, or (iii) petrochemical companies that demand natural gas liquids to produce plastics and other related products. Yet the credit profile of these customers can differ significantly, and the motives of each differ. A producer wants to ensure its supply has transportation options to exit the producing region. A utility company, for example, is less concerned about price and more focused on assurance of delivery to avoid an inability to provide power or heating in the winter.
In summary, contracts of supply-push assets are generally more commodity-price sensitive, while contracts of demand-pull assets are generally less commodity-price sensitive and more stable.
When an investor chooses a midstream investment product based on an MLP-dedicated index such as AMLP, MLPA, MLPI, and AMJ, she fails to get comprehensive exposure representing U.S. midstream assets. And at the same time the investor fails to get exposure to quality midstream companies like KMI and WMB that are not MLPs by legal structure, but own and operate attractive energy infrastructure assets that are demand-pull oriented.
For additional information on the NYSE Pickens Core Midstream Index please visit our website. For information regarding the BP Capital Fund Advisors TwinLine Midstream Strategy managed accounts click here.
¹ Core midstream candidates are defined as MLPs and C-Corps domiciled in the U.S. with greater than 50% of operating margin and/or revenue derived from core midstream activities, which include pipeline transportation, gathering & processing, NGL fractionation, terminals and storage assets, and liquefaction activities. Core midstream candidates must have a market capitalization greater than $500MM as of 10/18/18.
² Announced and pending simplification transactions displayed in Exhibit 1.
³ Market caps as of 9/28/18: KMI: $39B, WMB: $33B, OKE: $28B, TRGP: $13B. Core midstream Universe: $475B.
⁴ According to Bloomberg-derived Wall Street consensus dividend estimates for 2018, 2019, and 2020 as of 11/28/18.
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