Should You Invest in Oil and Gas Pipelines Alongside T. Boone Pickens?

Pickens with Andrew Littlefair at listing of Clean Energy Fuels. Source: T. Boone Pickens

T. Boone Pickens is in the mutual fund business.

On the surface, it may look like just another way for Pickens to make money, tying his name to a vehicle for the individual investor. And while there's surely at least some truth to that, I decided to dig a little deeper. After all, investing in MLPs like Targa Resources Partners LP  (NYSE: NGLS  )  and its general partner Targa Resources Corp  (NYSE: TRGP  ) , can be complex, making it hard for the average investor to know which oil and gas pipeline operators (the historical space for MLPs) will provide the best return over the next several decades. Add in the potentially complex tax rules and limitations some IRAs have when it comes to owning MLPs, and it may seem more trouble than it's worth. 

I was able to speak with fund Principal and Portfolio Manager Toby Loftin, and he explained what he thinks makes this mutual fund a worthy investment. He claims BP Capital's advantages, specifically having access to Boone Pickens' and his team's expertise in oil and gas, will lead to strong long-term performance. Is it worth more than the 110 to 175 basis points in fees? Is the Boone Pickens advantage worth the cost to invest, or is the Twinline MLP Fund just another overpriced mutual fund?

Inside advantage led to Targa Resources

Toby Loftin, principal and portfolio manager for BP Capital Fund Advisors. Source: BP Capital Advisors

Most mutual funds -- 80% or more -- underperform the benchmark they are measured against, meaning most investors are better off with a low-cost ETF that tracks to that index. Simply put, when fees are factored in, mutual funds rarely work to investors' best interests. However, BP Capital Fund Advisors identified a number of advantages it has that uniquely position his team to succeed, according to Mr. Loftin. He highlighted three keys as being central; primarily BP Capital's historical focus on the commodity markets, and its private ownership culture. By understanding where the growth in the actual production is happening, and tying this to where the demand is and will be, the fund managers are better able to invest in the right pipeline operators and MLPs. 

A case in point that Loftin used are key holdings in the fund, Targa Resources Corp and Targa Resources Partners:

We've been overweight in TRGP (the parent,) but we've also owned NGLS (the MLP.)  The MLP, the asset footprint is enviable, because they have a spot at Mont Belvieu, the major hub for natural gas liquids. We talked about the glut of ethane supply; that is exactly what you want to be. You want to be the guy solving the oversupply problem for the producers. Targa sits in this position almost as the prime intermediary between the producers and the petrochem guys. They also have leverage to LPG exports. Targa was able to build these LPG export projects that move the needle for Targa. When you look at their asset footprint, the management team, they maintain conservative distribution coverage policies, and their balance sheet is in order. In all, we've been overweight in Targa Resources Corp because of these reasons. 

Downside protection
Loftin also highlighted Boardwalk Pipeline Partners, LP  (NYSE: BWP  ) as a company he said they "actively avoided." Boardwalk Pipeline Partners has seen its business hammered due to the explosion of the Marcellus shale near the same time that the company's contract base was coming due. As Loftin said, "they had the right kind of asset (pipelines), it was just in the wrong place, and flowing the wrong way. In our fund, we've never owned Boardwalk Pipeline Partners because we saw this coming for some years now."
 
Loftin pointed at BP Capital's ownership of mineral rights, and involvement in oil and gas production, as giving the fund managers access to the kind of information that can help both finding the Targa Resources, while being able to know to avoid the Boardwalk Pipeline Partners. 
 
Final thoughts: 
These are only two of the companies that the fund has considered, but it's a good example of how its expertise paid off. The question remains: Will this kind of performance remain a sustainable advantage, and will Loftin and his team be able to leverage it for market-beating returns for the long term? So far in 2014, the fund is up 8%, versus around 1% for the S&P 500. That's a decent start.
 
I think there could be something here, but -- and I want to stress this -- many other fund managers have tried to leverage some sort of innate benefit, and not gotten it done. The point is, there's no guarantee of either success or failure here. However, this is a very unique way to participate in a focused portfolio of MLPs and with experts with much deeper insight than another mutual fund manager might have. If you decide to invest with Pickens' mutual fund team, make sure you go into it understanding the fees, that you give the portfolio managers time to prove their worth, and that you don't get too caught up in a single quarter's strong -- or poor -- performance.

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Read/Post Comments (4) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 27, 2014, at 7:13 PM, TMFVelvetHammer wrote:

    burgermcshame:

    1) Back in 2008/2009, Pickens allowed most private investors in BP Capital (his hedge fund) exit early, and to since, the firm has largely just managed Pickens' personal wealth.

    2) This is starting to change, as there is a new private equity fund that the firm has started up. I wrote an article last week that highlighted the first investment into a natural gas-powered generator maker.

    3) This is completely separate from the mutual fund mentioned in this article. The fund is legally and financially separate from BP Capital, and named BP Capital Fund Advisors.

    It is required to be a separate entity by law. So of course any investments made into the fund aren't going to show up on the 13F for BP Capital.

    The reason you don't see 13F filings as of yet for the fund is its small size, so it probably isn't required to file 13Fs yet. As it grows, I'm sure you'll start seeing 13Fs.

    As to BP Capital's 13Fs, I think it's important to understand that the majority of that money is in energy futures, oil and natural gas well ownership, and private equity stakes, and not as much in stocks. So no 13F updates.

    As to CLNE's profitability, the company reported 2 profitable quarters in 2010. :)

    -jh

  • Report this Comment On April 27, 2014, at 8:15 PM, ferdiefor wrote:

    I have been in NGLS for five years and TRGP from when it went public and both have richly rewarded their investors with much more to come.

  • Report this Comment On April 28, 2014, at 12:32 PM, TMFVelvetHammer wrote:

    Burger,

    You may be confused, but I think you're also looking for something that isn't there.

    From Investopedia:

    >> Definition of SEC Form 13F: It is a quarterly filing required of institutional investment managers with over $100 million in qualifying assets. <<

    "Qualifying assets" means essentially a stock or option position in a company that's traded on a U.S. stock exchange. The only thing you'll ever see on a 13F is stock positions. It doesn't report anything else.

    Pickens isn't like Buffett or Peter Lynch or Carl iCahn or George Soros or David Tepper or Seth Klarman, who manage funds that are primarily stocks.

    Pickens invests largely in energy futures, and those don't go on a form that reports stock positions in publicly traded companies.

    As to the Moser press release:

    >>The partnership will create a third company, Mesa Natural Gas Solutions, under which Moser will make the engines while BP Capital promotes them. <<

    So Pickens' role isn't "promotion only." A third company was created, and this third company will be the sales and marketing group for the expanded company.

    As to the photo, well, it's pretty simple. Pickens is mentioned in the article. It's a picture of him.

    Not sure why you seem to have it out for Pickens. In my experience he's fiercely honest and direct, and not afraid to speak his mind. A rarity in a public figure these days.

    I think the word you're looking for is "cynical," and not "confused." Instead of looking for something nefarious, why not just take this article at face value? It's simply a look at Pickens' company's new mutual fund offerings, which are unique in the marketplace, and I think that's worth making investors aware of. If you go back to Pickens' history in the '80s and early '90s, he has actually done a tremendous amount of good when it comes to shareholder activism. He was the original "activist investor" before anyone even knew what that was.

    Cheers,

    -jh

  • Report this Comment On April 28, 2014, at 9:14 PM, TMFVelvetHammer wrote:

    <<I believe what burger is saying is that your article is haphazard and full of holes, to put it simply. >>

    I'd appreciate it if you would be specific. I'm not following you at all there.

    To answer your questions:

    1) The mutual funds are new, and that's why they are small. You have to remember that they are competing with Fidelity and Blackrock and Vanguard; companies that have been in the mutual fund game for decades, and have relationships with the largest employers. It's not easy (I would assume) breaking into HR departments at large companies and getting them to offer your fund to employees.

    Let me be clear: I'm not advocating for these funds. 85% of mutual funds underperform the index. It's going to be very difficult for these guys to be any different.

    As to the Private Equity fund: Back in the recession, Pickens let a lot of his PE investors cash out, even though -- as was explained to me by Pickens' people -- these investors were still under lockup. Since then, BP Capital has been mostly just Pickens' and the other fund Principal's holdings, and not outside investors.

    This PE fund which features the Moser deal is a new fund, and this is just the first deal. I'm sure as more investors step up, and more opportunities show up, they'll do more deals, and the fund will grow.

    Again; not advocating for this fund, either. I do think it's created additional exposure for engines made by PSIX, and that's upside for that company, which I do like as an investment. Though I do not own shares.

    2) I cover CLNE pretty closely, and have for a few years. It started as a recommendation in a MF newsletter I subscribed to back before I started writing for the Fool, and grew into a company I really watch because of the impending growth of NG for heavy trucking.

    I'll just say that I am a shareholder, and that I understand the losses over the past few years: Very heavy CAPEX on expansion. This expansion is leading to fuel delivery growth that could be explosive (pun) over the next 24 months.

    Before that, I really couldn't say, though I think if we look at the company's history, we can find some clues:

    IPO in 2007. Companies often show losses after IPO, especially if it is investing heavily to grow. In 2008 and 2009 the recession hit pretty hard. You have to remember that CLNE's core business is fleet refueling. The company actually saw revenues decline over part of 2009 and 2010, largely because there weren't any major natural gas engines available for fleets, and companies and government agencies weren't investing in new vehicles.

    Nobody was spending money, CLNE got pinched.

    Since about 2011, the company has been building out both the ANGH and its retail CNG locations, at heavy expense. The 12 liter engine for heavy trucks was a year late to market, causing dozens of stations to sit idle because there were no engines for trucks available yet.

    These things have added up to big losses, but it's not like the company isn't growing. Revenues are up 170% since 2010. That's pretty strong.

    I've learned, though, that if we look hard enough, we can always find a way to "yeah, but this happened" as to why companies we like don't make money.

    This is sort of a "get it done" year for me with CLNE. Everything is in place. The engines are in the market. The stations are build. The 3rd and 4th quarter of 2014 are pretty important to proving the thesis to me.

    3) Read up on Pickens' history in the 1980s and early 1990s. He was involved in a number of corporate takeovers, largely at companies that had what he viewed as management that didn't fun companies in shareholder-friendly manners.

    He was also involved in several changes to SEC rules about shareholder rights, like the voting value of shares, etc.

    Again, please comment with specifics about this article being haphazard and full of holes. Thanking you in advance for extending me that courtesy.

    -jh

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