Investment conferences over the past several years predictably feature speakers waxing about the shale oil revolution as the biggest, if not only, bright spot in an economic landscape darkened by an economic “recovery” that never seems to gain its footing.
So on cue, Michael Underhill of Capital Innovations made sure the rollout of his new energy infrastructure fund would coincide with this week’s Morningstar Investment Conference.
Underhill’s message: the surge in oil and gas production that has fostered predictions of U.S. energy independence by 2030 is bigger than you think; indeed, some sources are now forecasting achievement of energy independence as early as 2018-'19.
“An estimated $641 billion worth of energy infrastructure assets will be built over the next 22 years,” he tells ThinkAdvisor in an interview.
His Vertical Capital Innovations MLP Energy Fund (VMLPX) aims to claim a piece of that growth by investing in midstream master limited partnerships involved in the gathering, processing, storing, transporting and marketing of natural gas, natural gas liquids and crude oil.
It’s not just growth opportunities that make the timing for such a fund favorable, but rather current economic and monetary trends — specifically, the Federal Reserve's plans to taper its asset purchases — that should benefit income investors as well.
“The Fed is actually talking — this week — about how the U.S. economy is approaching its targets on employment, GDP growth and fundamental economic indicators that indicate health of the U.S. economy,” he says.
“The current period is similar to 1993 and 1994, the last time the Fed meaningfully raised rates,” Underhill adds. “At that time period, energy produced some of the most amazing returns; energy in particular does well in a rising rate environment and works well as an inflationary hedge.”
The growth and income two-fer, along with a fund structure that Underhill calls “tax-aware” and that avoids the risks of exchange-traded notes — uncollateralized debt instruments that take on the credit risk of the issuer — are some of the points the VMLPX portfolio manager is pitching at Morningstar.
But the core case for the fund rests on its holdings’ “monopoly-like characteristics.”
Quoting Rockefeller, perhaps apocryphally, to the effect that “monopolies are like children — you don’t like them, until you have one of your own,” Underhill and co-portfolio manager Susan Dambekaln look for companies that have that dominant market structure of a “regulated monopoly,” he says.
Underhill cites Tesoro Logistics LP as an example a company that has that level of dominance. The limited partnership company charges a fee — Underhill likes the metaphor of a highway toll — for gathering, transporting and storing crude oil from the Bakken Shale (among other sites) through its pipelines and terminals.
Its shares offer a 2.3% yield, and 81% of its shareholder base is institutional, so it has a “stable, defensible market share,” Underhill says.
As long as Tesoro and companies like it collect the toll, then rising prices and increased volume strongly favor shareholders.
“We’re seeing oil and gas flowing through these pipelines," Underhill says. "Prices are going up, volume is going up. So it’s a very simple investment that lacks any kind of complexity. We do it in an MLP mutual fund [to produce] a simple, yet elegant tax-aware investment offering growth plus income.”
The current instability in Iraq, where the Al-Qaeda-affiliated ISIS movement is taking over large swaths of the country, is just the latest example of instability abroad that is having an impact on price. Crude oil is selling for more than $112 a barrel, up from around $18 earlier this month.
And Underhill says the volume in crude oil is also increasing since oil is “the cheapest and most scalable fuel option” that can meet the demands of U.S. manufacturers.
Renewed discussions in Washington about lifting restrictions on the export of U.S. energy products — were that ever to occur — would be another plus for what Underhilll calls the “price times volume equals profits business model.”
Underhill has negotiated selling agreements with independent broker-dealers since VMLPX’s rollout this month.
Even if interest rates or energy prices do not end up rising this week, the shale energy revolution and reshoring of manufacturing to the U.S. have proven to be hardy perennials on the advisor conference circuit.
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