It was just a few short years ago that the energy picture in the United States (“US”) looked bleak.  The projections showed that we had only a twenty-year supply of natural gas.  Because of new technology in fracking, the US is experiencing an energy renaissance.  However, until there is more technological breakthrough, we are still beholden to fossil fuels to keep our economy going.

There are three ways for energy to be delivered from the fields: trucks, railroads or pipelines.  We believe pipelines are the most efficient manner to deliver energy, trucks the least.  Railroads have some problems as there were two rail car derailments in February alone – one in Ontario and one in West Virginia.

Master Limited Partnerships (“MLPs”) were created to help investors invest in the infrastructure for energy.  In this arena, we particularly like midstream – pipeline – MLPs.  Why are these MLPs attractive?  First they have a yield of about 5% that should increase in the future.  Most contracts for companies using pipelines include annual price escalators tied to inflation.  Below is a chart from our friends at Chickasaw Capital Management showing the annual increase in distributions from MLPs over the past fifteen years.  If we are getting a current yield of 5% and next year the MLP distributes 10% more, our yield on our original investment is 5.5% in year two.  In our opinion, that is certainly more attractive than a bond paying the same amount each year.

What does this mean for portfolios?

MLPs are a great way to add a “real” asset to a portfolio.  Compare this investment to the $5 trillion of world bonds that are selling at a negative yield.  Mexico just issued a 100 year bond in Euros paying an annual yield of 4.2%.  To us, that is an investment that has way to much risk for the return we would be getting.  Investing in US assets that have a higher yield makes more sense in a fixed income world being turned upside down by central banks.

Sincerely,

Your THOR Team