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.
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).
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.