Criticizing MLPs Helps Them
Wednesday’s blog, Energy Transfer’s Weak Governance Costs Them drew a record number of pageviews within a few hours of being posted. It’s not just because Energy Transfer (ET) is a large, widely held MLP. Much of the writing in the sector is from cheerleaders who don’t criticize the companies they follow, because it’ll hurt their business model. Commentary is largely anodyne, and useless. Running an investment firm that doesn’t have a complex web of relationships with its portfolio companies provides a wonderfully liberating writing environment.
Sometimes readers ask why we own a stock if we’ve just been critical of its management. It’s possible to find a stock attractively cheap, and yet lament prior actions of its executives. That’s often why it’s cheap. ET is a well-run company. CEO Kelcy Warren has assembled a team that knows how to execute. If investors trusted him more, the stock would be higher. It’s worth pointing out.
Pageviews on our blog reveal that investors find criticism far more helpful than sycophantic platitudes. For those who desire an irreverent spin on the energy sector delivered with rapier-like wit, follow @Mrs_Skilling, an anonymous and astute energy insider who will simultaneously educate and amuse you. Often, posts are laugh out loud funny.
In case it gets lost in the cut and thrust of calling out bad management behavior, U.S. midstream energy infrastructure is a compelling investment opportunity. The Shale Revolution is almost entirely an American success story (see Why the Shale Revolution Could Only Happen in America). The technology behind fracking was developed in America because new business formation, access to capital and constant striving for success are more present here than anywhere. Add to those advantages an already substantial energy sector with thousands of skilled workers supported by extensive infrastructure.
Privately-owned mineral rights are an additional unique feature that allows landowners to negotiate with energy companies to extract what lies beneath on mutually beneficial terms. Mineral rights belong to the government all over the world, including in the UK, whose legal system is the basis for much of ours.
The result has been an American energy renaissance that has released new supplies of oil and gas, and made the U.S. the world’s biggest producer. Ten years ago few thought such an outcome possible.
Moreover, shale production is short cycle (see Shale Cycles Faster, Boosting Returns). Because the deployment of capital is more synchronized with production than conventional projects (think years and $BNs spent before production emerges as the traditional model), it’s less risky. Capital is recycled more rapidly, allowing production to be more responsive to price changes.
This is why it’s attracting the world’s biggest oil and gas companies. Exxon Mobil (XOM) is the most active driller in the Permian basin in Texas, where it is targeting one million barrels per day (MMB/D) of output in five years. Chevron (CVX) is close behind, with a 0.9 MMB/D goal.
Warren Buffett famously quipped that, had he been at Kitty Hawk in 1903 he could have shot down the Wright Brothers’ plane, thereby saving future airline investors from losing $BNs over the following decades. History is full of great ideas that didn’t immediately profit their inventors, often because too much capital followed the opportunity.
U.S. shale production of oil, gas and natural gas liquids will find a level at which returns on invested capital are adequate. It may already be there. It’s not always clear whose investment in upstream production will be most profitable. In the Barnett Shale, where the shale boom began, production peaked in late 2011 and only a handful of rigs remain active today.
Output will ultimately calibrate to a sustainable level of capital investment. Countless companies have provided proof of concept, although investment returns have been frustratingly disappointing. The growing presence of XOM and CVX is substantial confirmation that this is a permanent piece of the world’s energy markets.
Shale production has performed far better than investments in it. Midstream infrastructure, the pipelines, storage assets and processing facilities that sit between the wellhead and the customer, remains out of favor despite record volumes. This is also largely an issue of capital allocation, with the original income-seeking investors understandably alienated as the sector cut distributions to pay for new growth projects (see It’s the Distributions, Stupid!). But capex is falling, finally setting the stage for a surge in free cash flow (see The Coming Pipeline Cash Gusher).
Criticism of individual companies is intended to draw attention to ways they could improve their behavior, lifting stock prices to the benefit of all investors. The Shale Revolution remains a huge success story for production, highlighting much that is great about America. The companies that own these critical pipelines linking producers to consumers will continue to benefit from these growing volumes. Those who focus on valuations rather than past performance are likely to realize commensurate returns in the midstream.
We are invested in ET
The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)
This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r
Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.
Past performance of the American Energy Independence Index is not indicative of future returns.
Another well written, spot on article!! Love the chart and all the smart points !!