A Different Way to Play Energy Infrastructure Investments

Markets ETF Trends

The American Energy Independence ETF (NYSEARCA: USAI), which launched in December, provides investors with a new, unique way of accessing America’s booming oil production and related energy infrastructure investments.

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USAI follows the American Energy Independence Index, which includes U.S.- and Canada-based energy infrastructure companies. The USAI roster includes high-yielding master limited partnerships (MLPs) and general partners (GP).

MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.

Given the rising volume of U.S. oil production, with the U.S. Energy Information Administration projecting it could top 10 million barrels per day by February and even hit 11 million per day by the end of next year, investors may be better served with looking at MLPs or energy toll roads or the companies that provide necessary infrastructure to transport the increased oil flows. However, there are issues to be aware with funds that allocate more than 25% of their weight to MLPs.

“Almost all ETFs are Regulated Investment Companies, or “RIC-compliant”. This frees them from corporate taxes. However, funds investing more than 25% of their assets in Master Limited Partnerships (MLPs) are not RIC-compliant, and therefore taxed as corporations before making distributions,” said Simon Lack, CFA, Managing Partner at SL Advisors, USAI’s issuer, in an interview with ETF Trends.

Rising U.S. oil output coupled with deleveraging and improving balance sheets among many MLPs could prompt management teams to renew their focus on shareholder rewards after several years of diverting cash toward new investments.

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“While this alienated long-standing investors who liked stable distributions, and caused substantial underperformance versus the S&P500, cashflows are growing, leverage is falling and relative valuations are attractive,” said Lack. “Record U.S. crude oil output and growing natural gas exports will increase utilization of existing infrastructure, boosting cashflows. What used to be an income story now has a growth component.”

In November, U.S. oil production reached its highest levels since 1970 and is expected to top 11 million barrels per day in late 2019.

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