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

T. Boone Pickens' BP Capital Management now offers a couple of mutual funds, including its Twinline MLP fund. Portfolio manager Toby Loftin tells us how the advantages of being tied to a company with such a strong focus on commodities positions them for success. He gives us some insight into why the fund decided to invest in Targa Resources Partners, the MLP operated by general partner Targa Resources Corp. Are investors better off just buying Targa, or do the advantages Loftin speaks of make the fees that the fund charges worthwhile?

Apr 27, 2014 at 1:16PM
Tbp Andrew Littlefair At Nasdaq

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 Bp Capital Advisors

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.

Three more "under-the-radar" energy stocks with big potential
Let's face it: The U.S. energy boom is a tremendous opportunity for those who know where to invest, and even having T. Boone Pickens' team picking for you is no surefire guarantee. The Motley Fool has put together a report that highlights three energy companies that are not only positioned for growth, but also use a nifty IRS rule to pass more of the profits along to you.  Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Jason Hall has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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