The Alerian MLP Infrastructure Index (AMZI) gained 14.2% on a total-return basis during the trailing 12 months through November 30 compared to a 16.1% return for the S&P 500 during the same time period. Similar to 2011, the AMZI yield averaged 6%.
More importantly, AMZI weighted-average distribution growth on a year-over-year basis was 7.3% for third-quarter 2012. This is a meaningful increase from the 5.4% reported in the prior year period, driven by strong demand for crude-oil logistic services. Sunoco Logistics Partners LP and Magellan Midstream Partners LP grew their distributions by 25.2% and 21.3% year-over-year, respectively. Other double-digit distribution growers were Western Gas Partners LP (+19%), El Paso Pipeline Partners LP (+18%), Access Midstream Partners LP (+16%), ONEOK Partners LP (+15%), Targa Resources Partners LP (+14%) and MarkWest Energy Partners LP (+11%).
As natural gas prices remained depressed in 2012, energy-infrastructure master limited partnerships (MLPs) shifted their focus to relieving takeaway constraints for natural gas liquids (NGLs) and crude oil. Some of these solutions have involved building new pipelines; others have involved converting existing pipelines to ship different resources or flow in opposite directions.
Several NGL-rich plays experienced rapid production growth such as the Denver-Julesburg in eastern Colorado, the Eagle Ford shale in South Texas, the Permian basin in West Texas, and the Bakken shale in North Dakota. In 2012 alone, a record six new NGL pipelines were proposed to be constructed across 3,000 miles, with an aggregate capacity of nearly 1 million barrels per day.
Crude-oil production from the Alberta oil sands and the Bakken began to pick up rapidly last year, but pipeline capacity still remains an issue. Product that did manage to make it to the crude oil hub of Cushing, Oklahoma, was unable to make it further to Gulf Coast refineries due to capacity restraints there. The reversal of Seaway pipeline to flow from north to south relieved some pressure at Cushing, but additional solutions will still be needed.
Entering 2013, the results or resolution of the “fiscal cliff ” are on every MLP investor’s mind. During this period of uncertainty, hand wringing and price volatility will likely continue. What is certain is that MLPs will continue building infrastructure to connect the new shale plays to the processing and refining centers. Also, interstate liquids pipelines will raise tariffs by the Producer Price Index + 2.65% on July 1, 2013. Because these growth drivers are politically agnostic, as both sides of the aisle support energy security and independence, we can expect to see MLPs raise distributions by between 3% and 7% in 2013.
MLPs are likely to continue expanding into new business models. As an example, last year MLPs began to acquire more rail infrastructure in areas like the Bakken, where infrastructure was not in place and permitting for new infrastructure experienced delays. Due to its high cost, rail has traditionally been a temporary solution. Pipelines take both time (one to three years) and money ($2-$3 million per mile) to build. Meantime, thanks to rail infrastructure in place, moving product by rail provides necessary connectivity.
MLPs continue to represent a compelling investment in the energy-infrastructure build-out of the U.S. As their toll-road business models benefit from inelastic energy demand, and infrastructure needs provide opportunities for MLPs to build more assets, MLPs are expected to continue paying consistent and growing distributions.
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