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Transcript of ETF.com Webinar: MLPs at a Turning Point .Incentive structure at KMP (and most MLPs) sends...

  • ETF.com Webinar:

    MLPs at a Turning Point

  • Paul Britt, CFA Senior ETF Specialist ETF.com

    Panelists

    Scott Burley ETF Specialist ETF.com

    Peter Lazaroff, CFA, CFP® Portfolio Manager Acropolis Investment Management

  • Recent Market Volatility

  • Data Source: Bloomberg

    $70

    $75

    $80

    $85

    $90

    $95

    $100

    $105

    NYMEX WTI Crude

    Crude Oil Prices

  • Macro Events Impacting Oil Prices

     Strengthening Dollar

     Global Growth Forecast Revised Down

     Strong U.S. Shale Oil Production Growth

     Weakening GDP in Europe and China

     Refinery Maintenance Season

     Mixed Message from OPEC

    Source: Bloomberg

    -15.0%

    -10.0%

    -5.0%

    0.0%

    5.0%

    10.0%

    01 /0

    1/ 20

    10

    01 /0

    4/ 20

    10

    01 /0

    7/ 20

    10

    01 /1

    0/ 20

    10

    01 /0

    1/ 20

    11

    01 /0

    4/ 20

    11

    01 /0

    7/ 20

    11

    01 /1

    0/ 20

    11

    01 /0

    1/ 20

    12

    01 /0

    4/ 20

    12

    01 /0

    7/ 20

    12

    01 /1

    0/ 20

    12

    01 /0

    1/ 20

    13

    01 /0

    4/ 20

    13

    01 /0

    7/ 20

    13

    01 /1

    0/ 20

    13

    01 /0

    1/ 20

    14

    01 /0

    4/ 20

    14

    01 /0

    7/ 20

    14

    01 /1

    0/ 20

    14

    Inverted DXY WTI

  • Data Source: Bloomberg.

    Impact of U.S. Dollar

    -15.0%

    -10.0%

    -5.0%

    0.0%

    5.0%

    10.0%

    Inverted DXY WTI

  • Macro Events Impacting Oil Prices

     Strengthening Dollar

     Global Growth Forecast Revised Down

     Strong U.S. Shale Oil Production Growth

     Weakening GDP in Europe and China

     Refinery Maintenance Season

     Mixed Message from OPEC

    Source: Bloomberg

  • Source: IMF World Economic Outlook

    3.6

    2.0

    2.6

    1.0 1.2

    5.1

    7.3

    3.6

    2.2

    2.8

    1.2 1.4

    4.9

    7.5

    3.3

    1.8 2.2

    0.8 0.9

    4.4

    7.4

    0.0

    1.0

    2.0

    3.0

    4.0

    5.0

    6.0

    7.0

    8.0

    World Advanced Economies

    U.S. Euro Area Japan Emerging Market and Developing Economies

    China

    An nu

    al C

    ha ng

    e %

    IMF Real GDP Estimates and Projections for Year 2014 Oct-13 Apr-14 Oct-14

  • Source: IMF World Economic Outlook

    4.0

    2.5

    3.4

    1.4 1.1

    5.3

    7.0

    3.9

    2.3

    3.0

    1.5

    1.0

    5.3

    7.3

    3.8

    2.3

    3.1

    1.3

    0.8

    5.0

    7.1

    0.0

    1.0

    2.0

    3.0

    4.0

    5.0

    6.0

    7.0

    8.0

    World Advanced Economies

    U.S. Euro Area Japan Emerging Market and Developing Economies

    China

    An nu

    al C

    ha ng

    e %

    IMF Real GDP Estimates and Projections for Year 2015 Oct-13 Apr-14 Oct-14

  • Macro Events Impacting Oil Prices

     Strengthening Dollar

     Global Growth Forecast Revised Down

     Strong U.S. Shale Oil Production Growth

     Weakening GDP in Europe and China

     Refinery Maintenance Season

     Mixed Message from OPEC

  • -

    1

    2

    3

    4

    5

    6

    -

    0.20

    0.40

    0.60

    0.80

    1.00

    1.20

    1.40

    1.60

    1.80

    2.00

    Ja n-

    07

    Ap r-

    07

    Ju l-0

    7

    O ct

    -0 7

    Ja n-

    08

    Ap r-

    08

    Ju l-0

    8

    O ct

    -0 8

    Ja n-

    09

    Ap r-

    09

    Ju l-0

    9

    O ct

    -0 9

    Ja n-

    10

    Ap r-

    10

    Ju l-1

    0

    O ct

    -1 0

    Ja n-

    11

    Ap r-

    11

    Ju l-1

    1

    O ct

    -1 1

    Ja n-

    12

    Ap r-

    12

    Ju l-1

    2

    O ct

    -1 2

    Ja n-

    13

    Ap r-

    13

    Ju l-1

    3

    O ct

    -1 3

    Ja n-

    14

    Ap r-

    14

    Ju l-1

    4

    O ct

    -1 4

    M nB

    bl /D

    ay

    M nB

    bl /D

    ay

    U.S. Shale Oil Production

    Total Light Tight Oil Bakken Eagle Ford Haynesville

    Marcellus Niobrara Permian Utica Source: EIA

  • Macro Events Impacting Oil Prices

     Strengthening Dollar

     Global Growth Forecast Revised Down

     Strong U.S. Shale Oil Production Growth

     Weakening GDP in Europe and China

     Refinery Maintenance Season

     Mixed Message from OPEC

  • Macro Events Impacting Oil Prices

     Strengthening Dollar

     Global Growth Forecast Revised Down

     Strong U.S. Shale Oil Production Growth

     Weakening GDP in Europe and China

     Refinery Maintenance Season

     Mixed Message from OPEC

  • Macro Events Impacting Oil Prices

     Strengthening Dollar

     Global Growth Forecast Revised Down

     Strong U.S. Shale Oil Production Growth

     Weakening GDP in Europe and China

     Refinery Maintenance Season

     Mixed Message from OPEC

  • Data Source: Bloomberg (S&P 500 Oil & Gas Exploration & Production Index, Alerian MLP Index, NYMEX WTI Crude Oil)

    Recent Performance: E&P, MLP, and Oil

    -35%

    -30%

    -25%

    -20%

    -15%

    -10%

    -5%

    0%

    5%

    E&P MLP Oil

  • Historical Correlation to Crude Oil

    Source: Bloomberg (as of 11/18/14)

    Alerian MLP S&P 500 S&P 500 Energy

    1 Month 0.66 0.35 0.65

    1 Year 0.29 0.14 0.42

    3 Year 0.29 0.25 0.45

    5 Year 0.47 0.50 0.65

    10 Year 0.39 0.32 0.59

    MLP correlations to crude oil tend to spike in the short-run, but remain low over the long run.

    Historical Correlations to Crude Oil (WTI)

  • Benefits of MLP Exposure

     Growth of U.S. Energy Infrastructure

     Need over $135 billion in energy infrastructure projects in U.S. by 2016

     Stable and Growing Cash Flows

     Fee-based toll road business models

     Average distribution growth of ~ 7% over the past 10 years

     No Entity-Level Taxation

     No double taxation leads to more competitive cost of capital

     Tax-Efficient Yield

     70%-100% of income is treaded as tax-deferred “return of capital”

     If held until death: MLPs step up in basis and income on distribution avoid most

    taxation

     Portfolio Diversification

     Low correlation to broader markets

     Less dependent on overall economic growth

  • Kinder Morgan Transaction

  • Kinder Morgan Transaction

    Solving the Growth Problem  Incentive structure at KMP (and most MLPs) sends increasing share of total cash

    distributions to the general partner, creating a significant headwind to distribution growth.

     The more successful an MLP is at growing distributions, the more difficult it will become to

    sustain that growth.

     Old solution: MLPs buy out their GPs’ incentive distribution rights (IDRs)

     New solution: GP buys out their MLPs

  • Kinder Morgan Transaction

    Industry Implications  MLP structure remains a highly attractive operating and financing structure

     Considerable running room for asset class due to infrastructure build out needs

     MLPs with higher distribution splits more likely candidates for “simplications”

     Mature MLPs with significant asset footprints are well-positioned to become consolidators

     Continued MLP consolidation, supporting robust industry valuations and prompting smaller

    MLPs to get bigger or get bought.

  • Kinder Morgan Transaction

    MLP Fund Implications  Index Changes

     KMP = 9.34% of Alerian MLP Index (as of 9/30/14)

     EPB = 2.72% of Alerian MLP Index (as of 9/30/14)

     Taxes

     Tax effect on funds that are “closed-end” or organized as C-corporations should be

    minimal

     Mutual funds that are “registered investment companies” will realize taxable income if

    they hold the affected MLP units

     Exchange traded notes (ETNs) experience no tax consequences

     Active management may have short-term advantage over passive funds

     No material change in yield and distribution growth for passive funds

  • Considerations for MLP Exposure

  • Ways to Invest

    Product Type Direct Inves