Advisory Research - CFA Institute Files/2019/Investmen… · ADVISORY RESEARCH INVESTMENT...

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180 North Stetson Avenue

Suite 5500

Chicago, IL 60601

Tel: 312 565-1414

Fax: 312 565-2002

These materials are being furnished for informational purposes, for use in one-on-one

presentations only, and are not to be distributed. The materials may not be reproduced or

disseminated without the express prior consent of Advisory Research, Inc.

Advisory ResearchA presentation on:

MLP and Energy Infrastructure

ADVISORY RESEARCH INVESTMENT MANAGEMENT | 2

History of Energy InfrastructureWhat is Energy Infrastructure?

• Midstream-focused assets that are critical to delivering energy to industry and

consumers in a reliable and safe manner

• Master Limited Partnerships are publicly traded partnerships primarily operating in

the natural resources and energy infrastructure industries

Source: Pexels

ADVISORY RESEARCH INVESTMENT MANAGEMENT | 3Source: Courtesy the Library of Congress, U.S. Farm Security Administration/Office of War Information Black & White Photographs.

History of Energy InfrastructureBig Inch and Little Big Inch Pipelines of WWII

ADVISORY RESEARCH INVESTMENT MANAGEMENT | 4Source: Thompson Reuters Eikon

History of Energy InfrastructureMap of Midwest Pipelines

PATOKA

INDIANAPOLIS

St. LOUIS

CHICAGO


History of Energy InfrastructureEnergy Infrastructure Market Cap Breakout

Source: Advisory Research

Data as of 12/31/18

Energy Infrastructure Issuers By Market Cap

20%

30%

40%

50%

60%

70%

80%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Energy Infrastructure Issuers by Market Cap

MLPs C-Corp Equities


1 Based on inception dates of MLP products sourced from eVestment as of 12/31/18.2 Advisory Research sub-advises three Closed-End Funds.3 Advisory Research provides investment management services to Separately Managed Accounts and is the Registered Investment Adviser to the open-end mutual funds. The MLP Balanced Strategy is the underlying investment strategy of the open-end mutual funds (INFIX and MLPPX). The mutual funds are distributed by IMST Distributors, LLC.

History of Energy InfrastructureThe MLP Team has a long-term track record of innovation in the asset class

Inception

of longest

MLP track

record1 Launched

second MLP

exchange-traded

investment

product2

Launched unique MLP

Balanced Strategy3

investing across the

capital structure

1995 2004 2006 2010 2018

Building on

23+ years

of an ever-

changing MLP

landscape

First

institutional

account

inception


History of Energy InfrastructureEvolution of MLPs

Source: Advisory Research

1981 First MLP created,

commodity-sensitive,

upstream model

1987 – 19931987 Tax Reform

creates a yield-

focused midstream

MLP market

1997 – 2005MLPs evolve into

a growth vehicle

2004 – 2007GP IPOs give investors

added exposure to

growth

2015 – 2018Energy Crisis; Ensuing

bankruptcies,

distribution cuts,

simplifications

2008 – 2015Upstream MLPs re-emerge;

Brand-name sponsor MLP IPO

Timeline

MLP HISTORICAL TIMELINE


30

35

40

45

50

55

60

2014 2015 2016 2017 2018 2019E 2020E

US

D in B

illio

ns

Year-End

Energy Infrastructure TodayWall Street analysts expect EBITDA to grow as new projects come online over the next few years

Data as of 2/28/19. Source: Advisory Research, FactSet Research Systems. Note: Data is based on annual observations

using the current Alerian MLP Index constituents. Numbers are sell-side estimates sourced from the FactSet Research

Systems estimates database. The data used for each security is the Consensus Median Estimate. Data does not

represent or predict the performance of any investment. Past performance is no guarantee of future results.

Alerian MLP Index

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)


0

100

200

300

400

500

600

Alerian MLP Index Price Index

Energy Infrastructure TodayThe Alerian MLP Price Index is down almost 50% since peaking in 2014

Period: 8/31/14 – 2/28/19

Source: FactSet Research Systems

Alerian MLP Index Price Index


Energy Infrastructure TodayMLPs remain in undervalued territory

Period: 12/31/05 – 2/28/19

Source: FactSet Research Systems. Composite valuation based on both relative and absolute valuation metrics.

Past performance is no guarantee of future results. Valuations and long-term return expectations do not represent or predict the performance of

any particular investment. Standard deviation is a measure of volatility, which shows how much variation exists from the average return.

Measure of where MLPs are trading

relative to their historical trading range.

MLP Valuation


Energy Infrastructure TodayChallenges remain but the midstream story is clearly improving

Fundamental Structural Sentiment

U.S Production Simplified Structure Political & Regulatory

U.S. Energy Exports Distributions

Need for Energy Infrastructure Governance

Key Issues Outlook

GOODTH

E

BADTH

E

UGLYTH

E


Energy Infrastructure Today: The GoodU.S. oil and gas production is expected to make further gains in the coming years

Data as of December 2018

Source: U.S. Energy Information Administration, Short-Term Energy Outlook

U.S. Crude Oil Production (MMBbl/d) U.S. Natural Gas Production (Bcf/d)

60

70

80

90

100

110

2011 2013 2015 2017 2019 2021

U.S

. N

atu

ral G

as (

Bc

f/d

)

U.S. Natural Gas Production

Marketed Production December 2018 Estimate

Source: U.S. Energy Information Administration

4

6

8

10

12

14

2011 2013 2015 2017 2019 2021

U.S

. C

rud

e O

il (

MM

Bb

l/d

)

U.S. Crude Oil Production

Marketed Production December 2018 Estimate

Source: U.S. Energy Information Administration


Energy Infrastructure Today: The GoodU.S. energy exports are rapidly rising

Data as of December 2018

Source: U.S. Energy Information Administration, Short-Term Energy Outlook

U.S. Liquefied Natural Gas

(LNG)

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net

Exp

ort

s/(

Imp

ort

s) (B

cf/

D)

U.S. Liquified Natural Gas (LNG)

Source: Advisory Research, U.S. Energy Information Administration

Net Exporter

Net Importer


Energy Infrastructure Today: The GoodINGAA projects energy infrastructure spending at nearly $800bn through 2035

Data as of June 2018

Source: The Interstate Natural Gas Association of America (INGAA), North America Midstream Infrastructure through 2035

$417

$53

$321

Projected Capital Infrastructure Investment By Type, 2018-2035 ($ in Bn.)

Natural Gas Capex Natural Gas Liquids Capex Crude Oil Capex


Energy Infrastructure Today: The BadThe wave of midstream structural simplifications is in the late innings

Source: Dallas Business Journal, Reuters, PR Newswire

Note: This list includes midstream-only names.

Dallas Business Journal August 2018

Reuters May 2018

Midstream Simplifications

Completed 17

Announced 1

Possible 3

PR Newswire March 2019


Energy Infrastructure Today: The BadSimplification transactions are bolstering retained cash flow and improving stakeholder alignment

Source: Energy Transfer Website

Highlights from August 2018 Transaction:

• Simplifies ownership structure

• Lower payout ratio for MLP shareholder (31% distribution cut)

• Incentive distribution rights eliminated and reduced cost of capital

• Increases retained cash flow ($2.5 – $3.0bn annually) and enhanced credit profile (expected to

receive IG rating)

• Long-term distribution sustainability (pro-forma distribution coverage of 1.6x -1.9x)


-15%

-10%

-5%

0%

5%

10%

2014 2015 2016 2017 2018

Alerian MLP Index ETN Annual Distribution Growth

AMJ Distribution Growth

Energy Infrastructure Today: The BadDistributions have dropped the last four years

Period ending 12/31/18

Source: Alerian MLP Index ETN

Alerian MLP Index ETN (AMJ) Annual Distribution Growth


Energy Infrastructure Today: The BadS&P 500 companies have a greater percentage of independent board directors than energy infrastructure companies

Source: Advisory Research, Inc., FactSet Research Systems, Spencer Stuart U.S. Board Index 2017

Independent Board Directors

54%

85%

0%

20%

40%

60%

80%

100%

MLP & Energy Infrastructure Universe S&P 500

Independent Board Directors


Energy Infrastructure Today: The BadIDRs (Incentive Distribution Rights) can lead to competing motivations for MLP and General Partner shareholders

Source: FactSet Research Systems, Advisory Research

Data as of March 2019

MLP Market Cap

23%

77%

MLP Market Cap

IDRs No IDRs


Energy Infrastructure Today: The BadMLP corporate governance is under the microscope

Source: Advisory Research, FactSet Research Systems

Highlights of Corporate Transactions:

• July 2011: $79mm IPO

• December 2013 to September 2015: $229 of equity issuance

• July 2018: 75% distribution cut announcement, stock subsequently falls 43%

• September 2018: Private Equity affiliate offers to buy-in remaining $234mm stake at a small

premium


Energy Infrastructure Today: The UglyA litany of political and regulatory issues continue to dog the asset class

Source: Bloomberg, Denver Post, Forbes

August 2018

March 2018

August 2018


Future of Energy Infrastructure The impact of renewables

Traditional energy infrastructure remains essential but new renewables will become more relevant

ADVISORY RESEARCH INVESTMENT MANAGEMENT | 23Data as of December 2018

Source: U.S. Energy Information Administration, Monthly Energy Review

Future of Energy Infrastructure Natural gas has overtaken coal and nuclear as the primary sector for electricity generation

2017 U.S. Electricity Net Generation by Sector 1997 U.S. Electricity Net Generation by Sector

Coal

Nuclear

Natural Gas

Solar Wind0%

10%

20%

30%

40%

50%

60%

Natural GasCoal

Nuclear

Wind

Solar

0%

10%

20%

30%

40%

50%

60%

ADVISORY RESEARCH INVESTMENT MANAGEMENT | 24Data as of December 2018

Source: U.S. Energy Information Administration, From EIA-860, “Annual Electric Generator Report” Monthly Update

U.S. Utility-Scale Coming Online from Dec. 2018 to Nov. 2019

Future of Energy Infrastructure 2019 U.S. electricity additions will be natural gas and renewable (wind & solar) focused


Future of Energy Infrastructure Crude oil demand growth may decline slightly as Battery Electric Vehicle (BEV) adoption increases

Source: Advisory Research, Inc., U.S. Energy Information Administration

100

105

110

115

120

Cru

de O

il (M

MB

bl/d

)

Global Crude Oil Demand Scenarios

0.80% Growth Hyper-growth Renawable Adoption

Hypothetical Scenario: BEV Adoption on Global Crude Oil Demand


Future of Energy Infrastructure Efficiency gains may be more impactful than Battery Electric Vehicle (BEV) adoption

Source: Barclay Research

Potential evolution of oil demand from passenger vehicles from

2017 to 2030(M

MB

bl/d

)


Investing in Energy InfrastructureInvestment Product and tax complexities are key considerations for investors

Vehicle Separate AccountRIC Open-End Mutual

FundsClosed-End Funds

Tax Reporting Multiple K-1s1099, No UBTI or State

Tax filings

1099, No UBTI or State

Tax filings

BenefitsCustomized MLP portfolio No leverage,

Daily Liquidity at NAV

MLP dedicated portfolio

with a yield focus


-50%

-40%

-30%

-20%

-10%

0%

10%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Cumulative Relative Performance: AMLP ETF vs. AMZI Index

Investing in Energy InfrastructureThe largest ($9bn.) investment MLP vehicle, the Alerian MLP ETF, has high fees and poor performance versus the

Index

Source: FactSet Research Systems

Note: Alerian MLP Infrastructure Index has been used as the benchmark to calculate relative performance.

Period: 08/25/10 to 2/28/19

Cumulative Relative Performance:

Alerian MLP ETF vs. Alerian MLP Infrastructure Index Benchmark


Energy Infrastructure Final Thoughts

• Our long-term total return expectations are between 7%-11%

• Challenges remain but the midstream story is clearly improving

• Strong underlying business fundamentals

• Distribution growth is expected to resume in 2019

• Sentiment is improving as we move away from the energy crisis

• Renewables are rapidly growing and should be included in an energy infrastructure

portfolio

• Understand your investment product

Advisory Research - CFA Institute Files/2019/Investmen… · ADVISORY RESEARCH INVESTMENT...

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