AUGUST 13 • 2014 online EDITION
Energy
Kinder Morgan Deal Ushers in a Golden
Age of MLP Investing
by CHRISTOPHER HELMAN, STAFF
The Great American Oil &
Gas Boom requires thousands
of miles of new pipelines.
That’s why Greg Reid of
Salient Partners thinks the
next decade should be the
golden years of energy infrastructure investing.
based Salient Partners, figures that
The biggest risk: if oil prices fell to $80
depending on how long investors have
a barrel and stayed there.
held KMP units they could be looking
Many investors are drawn to MLPs
at a tax bill of as much as $15 per $92
seeking higher yields than what they
unit. Says Reid, “Investors are going to
can get on bonds. Reid, however, says
be forced to pay some taxes.”
that he focuses his strategy more on
The whole reason to invest in MLPs going after lower yielding MLPs that
is that they are tax advantaged, with
are instead investing their cash in
income passing through to the untigrowth projects. “Over the last 10 years
holder rather than being taxed twice
it is clear that higher yielding MLPs
as with C-corps. So will the Kinder
have had lower growth rates. While
couple days now after
tax hit be enough scare other tax-wary
lower yields have delivered higher
Rich Kinder announced
MLP investors out of the market?
rates of return.” If a partnership is
his $70 billion consoliNot a chance, says Reid, who thinks
yielding 9%, he says, it’s because it has
dation, the MLP sector
the Kinder deal is a one-off. After all,
a lot of risk.
is still trying to come to
other recent megadeals are doubling
Reid’s Salient Midstream & MLP
grips with the deal that one oil patch
down on the MLP vehicle rather than
Fund, a closed-end fund (NYSE:SMM),
watcher told me was so unexpected it
abandoning it. Williams Partners last
boasts a 5% dividend yield. His largest
amounted to “a 180-degree curve ball
month acquired all the general partner investments in the fund include Enterfrom left field.”
and limited partner interests in Acprise Products Partners, Williams ComOne big surprise are the tax implicess Midstream Partners in a $6 billion panies, Energy Transfer Equity, Plains
cations of the deal, by which Kinder
deal. And NGL Partners is seeking to
All-American Pipeline and Enbridge Enaims to consolidate his Kinder Morgan acquire the rest of TransMontaigne
ergy Management. The Salient closedenergy infrastructure empire and elim- Partners, after having already acquired end fund trades at a 7% discount to net
inate his master limited partnerships.
its general partner.
asset value; shares are up 25% in the past
Analyst Becca Followill of U.S. Capital
“They’re happy with the tax adyear, 40% in two years.
Advisors notes today that although
vantages of passing through income
MLP funds are generally benchKinder’s deal presentation suggests
to unitholders, and see no reason to
marked against the Alerian MLP Index
KMP holders will see a 30% uplift in
change,” says Reid. He figures the
(up 18% in a year), but in his funds
value when their units are bought out,
total market value of MLPs and their
Reid has been beating the index as
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that is only on a pre-tax basis. The
GP interests amounts to $900 billion
well as bigger MLP funds like Kayne
buyout constitutes “a dividend recapright now. That is set to grow rapidly
Anderson (NYSE:KYN). He’s done it in
ture event,” which is taxed at ordinary
as massive new investments are made
part by focusing his investments in the
income rates. Greg Reid, who manages
in the burgeoning oil and gas fields of
general partnerships, or GPs, which
$4.3 billion in MLP assets at HoustonTexas, North Dakota and Pennsylvania. control the MLPs and enjoy the lion’s
A
share of cash distributions.
GP interests often get overlooked by
MLP investors because they tend to have
lower yields. But they also have lower
risk, and have tended to grow in share
value faster than their underlying MLPs.
One of Reid’s biggest GP investments is
Plains GP Holdings, which owns the GP
of Plains All American Pipeline. Over the
past year, units of Plains GP are up 38%,
while Plains All American is up 17.5%.
Same thing with another holding, Targa
Resources Corp. (NYSE:TRGP), which
owns the GP of MLP Targa Resources
Partners (NYSE:NLGS). TRGP shares
are up 420% over 5 years, more than
double NLGS.
The cash streams commanded by
the GP interest holders are so juicy that
we’ve seen big MLPs like Enterprise
Products Partners, Magellan Midstream
and MarkWest Energy Partners buy out
their general partner interests as a way
to keep up distribution growth.
Reid figures the value of the companies holding GP interests amounts to
about $350 billion, or 40% of the $900
billion market cap of the energy infrastructure sector. And yet the Alerian
MLP Index has zero exposure to them,
while the S&P MLP Index has just
8%. Reid’s energy infrastructure funds
have about 22% devoted to C-corps
that hold GP interests.
(Note: A reader asked whether
holding MLPs within the structure of
an exchange-traded closed-end fund
negates their tax advantages. Reid explains that because the Salient Midstream & MLP Fund is a Registered
Investment Company, it is not taxed
as a corporation, but rather is a passthrough trust. In order to qualify as an
RIC the fund has to own less than 25%
in MLPs, which it does.)
You could try picking your own energy infrastructure investments. The tax
incentives are great, but the complicated
K-1 tax forms you get from every MLP
are a real disincentive if you’re just a
small investor. For many people it makes
more sense to buy a mutual fund, or
closed-end fund — and let Reid’s people
deal with the paperwork.
(#82628) Reprinted with permission of Forbes Media LLC. Copyright 2014. To subscribe, please visit Forbes.com or call (800) 888-9896.
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The opinions expressed in these materials represent the personal views of Salient’s investment professionals as of the date of the interview
and are based on their broad investment knowledge, experience, research and analysis. However, market conditions, strategic approaches,
return projections and other key factors upon which the views presented in these materials are based remain subject to fluctuation and
change. Consequently, it must be noted that no one can accurately predict the future of the market with certainty or guarantee future investment performance.
Before investing, prospective investors should consider carefully the Fund’s investment objective, risks, charges
and expenses. For more complete information about the Fund, please contact your financial advisor. For more information visit www.salientfunds.com or call 800.994.0755.
WORD ABOUT RISK
The Funds’ investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may
increase price fluctuation. The value of commodity-linked investments such as the MLPs and Other Energy Companies in which the Funds
invests are subject to risks specific to the industry they serve, such as fluctuations in commodity prices, reduced volumes of available natural
gas or other energy commodities, slowdowns in new construction and acquisitions, a sustained reduced demand for crude oil, natural gas
and refined petroleum products, depletion of the natural gas reserves or other commodities, changes in the macroeconomic or regulatory
environment, environmental hazards, rising interest rates and threats of attack by terrorists on energy assets, each of which could affect the
Funds’ profitability.
The MLPs owned by the Fund are subject to regulatory and tax risks, including but not limited to changes in current tax law which could result
in MLPs being treated as corporations for U.S. federal income tax purposes or the elimination or reduction of MLPs tax deductions, which
could result in a material decrease in the Funds’ NAV and/or lower after-tax distributions to the Funds’ shareholders.
MLP returns have the potential to be highly volatile, an MLP is also subject to liquidity risk, potential conflicts of interest as a result of the MLP
ownership structure and the risks of the specific sector in which the MLP is concentrated.
Closed-end funds frequently trade at a discount from their net asset value. The risk of loss due to this discount may be greater for initial
investors expecting to sell their shares in a relatively short period after completion of the offering. An investment in the Funds is not appropriate for all investors and is not designed to be a complete investment program. The Funds are designed to be a long-term investment and
not as a trading vehicle.
Salient
Partners, L.P.
and affiliates
do not
provide tax or legal
advice. PleaseONLY.
consult yourNOT
tax or legal
professional
to determine how the
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information contained in the publication may apply to your situation.
Advisory services for the Salient Midstream & MLP Fund are offered through Salient Capital Advisors, LLC, a SEC registered investment
advisor. Registration as an investment advisor does not imply any level of skill or training. Salient is the trade name for Salient Partners,
L.P., which together with its subsidiaries provides asset management and advisory services. Salient Partners, L.P. is the parent company to
Salient Capital Advisors, LLC.