Tortoise Capital: Energy MLPs a Good Bet

Tortoise Capital, a leading MLP investment and portfolio management firm, offers several practical reasons why Energy Infrastructure Master Limited Partnerships have a bright future. They make some brief, yet compelling points – I have summarized and expanded upon them below:

Income & Growth Upside

Energy Infrastructure MLPs distribute most of available cash flow to LP unitholders. As their earnings increase through organic and acquisition growth, distributions to investors will continue to grow. This is especially true as larger petroleum companies sell off midstream assets to MLPs (which purchase them at favorable valuations).

Stable Cash Flow

MLPs typically operate in the midstream energy space (transport via pipeline, etc.) which is a fee-based model. That means in boom or bust cycles they will generate cash flow even with fluctuating commodity prices. What does that mean in layman’s terms? If the economy is in a slump or booming, and whether oil or natural gas prices are high or low, these commodities will still need to get from point A (the well) to point B (the customer).

High Barriers to Entry

If you’ve ever taken a business or economics course you are probably familiar with this one. A high barrier to entry means that potential competitors will think twice before attempting to enter a market, because market entry requires significant spending. This makes sense: it takes a lot of capital, time, and skill to build and operate pipelines and other midstream assets.

Big Institutions Have Been Slow to Invest

Because of several different tax implications, larger institutions have been slow to invest in the MLP space. Mutual funds have avoided them because of timing issues with tax filing, while pension funds, endowments, etc. want to avoid the tax implications of “unrelated business taxable income” or UBTI. Bottom line: these don’t impact individual investors as much. However, if and when these larger players enter the market current investors should benefit from increasing market capitalization.