2 Ways You Can Profit From This $780 Billion Megatrend

Over the next 21 years close to $1 trillion will be spent on energy infrastructure as North America's legendary energy bonanza continues. This article highlights one company and one MLPs that are poised to make investors rich, both in terms of capital gains and high and growing income.

Jun 26, 2014 at 12:55PM

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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Adam Galas 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.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

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."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

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

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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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