2 Ways You Can Profit From This $780 Billion Megatrend

In 2003 there were just 32 MLPs with a combined market cap of $46 billion. Today, there are 108 worth $527 billion. 

There are several key factors responsible for this explosion of MLPs. First, regarding the nature of MLPs themselves, the tax benefits of master limited partnerships make them excellent vehicles for companies wanting to profit from real assets. This includes oil and gas producers or energy infrastructure such as pipelines. For a detailed explanation of MLP and general partner structures see this article; the bottom line is that MLPs don't pay taxes, but rather pass the tax liability along to individual unit holders (and most of that is tax deferred return of capital).

General partners, who operate the MLP, often act as its financier and acquire properties to sell to the MLP. In exchange, they typically get: assumption of debt, cash, and a larger ownership stake. Through these accretive acquisitions the MLP raises its distributions and thus triggers incentive distribution rights (IDRs) that can be worth as much as 50% of the MLP's marginal distributable cash flow. Thus the typical MLP has a higher yield but slower distribution growth while a general partner has a lower yield but much faster dividend growth -- making them excellent dividend growth stocks. 

Additional reasons for the popularity of MLPs is their increased stability. For example, 35% of MLP units are held by institutions, which leads to less volatility than most stocks. In addition, midstream and downstream MLPs (51% of all MLPs) have hard-to-replicate assets that generate steady cash flows and have fee-based contracts that include inflation protection.

Which brings me to the point of this article -- a $780 billion opportunity for long-term income investors. This opportunity is coming from the fact that IHS (a global information company) estimates that due to North America's energy boom $80 billion/year will need to be invested in midstream (pipeline and storage) and downstream (refining and processing) infrastructure through 2020, with an additional $60 billion/year from 2020-2025. 

This incredible infrastructure boom can make long-term income investors a lot of money. Recently I spoke with Mike Underhill, founder and Chief Investment Officer of Capital Innovations LLC. Mr. Underhill often appears on Fox Business News, Bloomberg TV and CNBC and is a respected speaker at industry conferences worldwide. He shared two investment ideas that demonstrated the potential for energy infrastructure investments.

Energy Transfer Partners  (NYSE: ETP  ) and its general partner Energy Transfer Equity  (NYSE: ETE  ) are excellent choices for those seeking secure, high and growing yields. 

The key to understanding the investment thesis behind Energy Transfer Partners is scale. This is not so much a single MLP or company but an intricate empire with total enterprise value of $90 billion:

  • Energy Transfer Equity is general partner to Energy Transfer Partners, Sunoco Logistics Partners, and Regency Energy Partners.
  • Energy Transfer Partners also owns 32.2% of Sunoco Logistics Partners as well as IDR rights. 
  • Energy Transfer Partners recently acquired Susser Holdings Corporation, the general partner of Susser Petroleum Partners (now Energy Transfer Partners owns 50% of Susser's limited units and 100% of gp and IDR rights) for $1.8 billion.
  • In a joint venture, Energy Transfer Partners and Energy Transfer Equity own Energy Transfer LNG, which operates a Lakes Charles, Louisiana LNG regasification and storage facility for the export of liquefied natural gas (LNG).
All told, the Energy Transfer empire consists of 61,900 miles of pipelines, 42 storage and export terminals, 25 processing facilities, and 6,400 gas stations. 
Energy Transfer Equity founder and Chairman, Kelcy Warren is not anywhere close to done with his empire building. In 2010 and 2011 he orchestrated $13 billion in acquisitions and just recently came close to a $15 billion to $17 billion acquisition of Targa Resources (which fell through at the last minute). 
 
Though the collapse of Energy Transfer Equity's largest ever acquisition attempt is regrettable, Mr. Warren's skills at growth through accretive acquisitions and faith in his MLPs (directly and indirectly owns $2 billion worth of units and shares)
is why long-term investors have done so well owning Energy Transfer Partners (18.9% annual total returns over last 13 years vs 7.5% for market) and Energy Transfer Equity (28% annual total returns over last 10 years vs 7.4% for market). 
 
Analysts are projecting 4% distribution growth for Energy Transfer Partners over the next decade, which combined with its 6.6% yield should result in total returns of approximately 10.6% annually. This should beat the stock market's 9.1% all time (1871-2013) growth rate and makes this a good pick for high-yield seeking investors; however, dividend growth investors would be better off owning Energy Transfer Equity. With its 2.6% yield and projected 10-year dividend growth rate of 18.5%, it is likely to be one of the best dividend growth stocks of the next decade. 
 
Foolish takeaway
America's coming midstream energy infrastructure boom means a historical opportunity for long-term income investors to lock in the trifecta of investing: high, secure yields, quickly growing income, and market beating capital gains. Energy Transfer Partners and Equity Transfer Equity represent two strong choices in this sector and for cashing in on North America's energy boom for decades to come. 
 

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