T?he influx of new infrastructure and growth in the oil and gas midstream sector continues to attract investor attention. Capital providers are positioned to jump on board and are seeing good rates of return on their investments.

In fact, the pipeline master limited partnerships (MLPs) included in the Wells Fargo Securities MLP index have provided some of the best risk-adjusted rate of returns of any asset class over the past decade, compared to Standard & Poor’s (S&P) 500 index and Barclays Capital U.S. Corp.’s High Yield Total Return index.

Also, in a recent equity research report, Credit Suisse Securities (USA) LLC states that “MLPs continue to perform well and we think valuations can remain at the high end of historic ranges given strong fundamentals, continued investor appetite for yield and a relatively attractive value proposition of an average yield of 6% and distribution growth of 3% to 6%. Our total return expectations are 8% to 12%.”

By such accounts, investors see smooth sailing ahead, but there are a few clouds on the horizon. Specifically, although new infrastructure is needed to serve growing supply from unconventional shale resource basins, some midstream shale-play operators’ ability to raise capital may be strained as they face recontracting risk, or the risk that expired contracts will not be renewed with the same favorable terms.

According to a recent S&P report, while the industry has always faced recontracting risk, it has worsened recently due to changing natural gas supply dynamics. Today’s hot shale plays could become less attractive as the industry seeks rich-gas and oil plays. As a result, S&P sees more value in pipeline contracts underwritten with consumers than in those underwritten by oil and gas producers. If faced with such recontracting risk, a pipeline company could receive lower credit ratings unless it decreases distributions to reduce debt.

Also, recent pipeline accidents have caused nationwide concern about operational failures and aging infrastructure. Public interests could bring increased oversight of operating and safety measures and increased maintenance spending, although such costs can usually be recovered through the regulatory process.

Despite these risks, many capital providers consider the midstream industry a yare vessel in which to invest. Mergers and acquisitions (M&A) have increased significantly as midstream operators seek to expand or streamline their asset portfolios, honing their focus toward liquids-rich plays. Construction in these areas relies on strong debt and equity providers to complete the capital-intensive projects.

Considering the slowdown of investment flow through 2009 and 2010, and these new investment opportunities, how have midstream investors changed their navigation tactics, and where will unconventional growth steer investment trends in 2011 and beyond?

Six industry professionals reveal their top financial trends to watch in the midstream sector.

Citigroup Inc.

When considering investment trends since 2009, Michael Casey, a director in the investment bank at Citigroup Inc., is optimistic that the burgeoning capital market will offer access to new players.

“Our expectation is that 2011 will be another very active year for equity capital formation amongst MLP and midstream companies.” Michael Casey, director, Citigroup Inc.

“Certainly both the credit and equity markets have recovered substantially from the dark days of late 2008 and early 2009,” he says. “As the search for yield has been a theme for equity investors, the MLP equity market has benefited from strong investor interest, allowing more than $15 billion of equity capital to be raised in 2010.

“We saw seven initial public offerings (IPOs) price in the MLP and midstream sector in 2010, raising $2.1 billion in proceeds.”

The MLP IPO market was reopened with the IPO of Plains All American Natural Gas Storage LP’s business, which was very well received by the market and paved the way for a variety of other issuers, he says. These include coal and E&P companies structured as MLPs, as well as general partners structured as C-Corps.

“We currently have visibility to a wide backlog of potential MLP IPOs that will span both a variety of subsectors and size of market cap. Our expectation is that 2011 will be another very active year for equity capital formation amongst MLP and midstream companies.”

Casey believes that access to both equity and debt will continue to be strong for midstream companies with strong business models and attractive growth opportunities. For Citigroup, these factors are important considerations when evaluating midstream companies.

“When we are backing a company, with either credit or underwriting securities offerings, we seek to partner with companies that have stable cash flows, attractive growth opportunities and strong management teams guiding them. Currently, there is significant capital being invested in creating new infrastructure to accommodate production activity in shale plays, such as the Eagle Ford and Marcellus. These types of growth stories resonate well with capital providers and the companies will have strong access to a variety of sources of capital to fund their growth plans,” says Casey.

But growth is not always so formulaic. According to Casey, “There are also some very attractive growth stories outside the premier shale plays, where management teams are building and growing great companies by virtue of focusing on opportunities that are below the radar of the larger players in the midstream sector.

“Often, these are your classic bolt-on growth stories through small, but highly accretive, acquisitions. We are working with several companies pursuing these types of growth strategies and they are great businesses.”

Banks are becoming increasingly aggressive in lending to energy companies, he says. Midstream companies are especially favored by banks and credit providers, due to the relative stability of their cash flows.

This robust access to capital in the bank and fixed income and equity markets provides significant financial fire-power for management teams to grow their businesses, he says.

On the flip side, the challenges in this market are evident. Casey admits, “I think the biggest challenge the sector is going to face is remaining disciplined in the pursuit of growth opportunities, specifically in the M&A market. Assets have gotten expensive again. Valuations have run up and midstream assets are pricey. M&A processes are competitive, and a disciplined buyer may not be the winner in the short term, but they will be successful longer term. We’ve seen this movie before.”

A number of factors have risen to create the attractive M&A environment, he says.

“You have the confluence of robust access to capital and very attractive valuations, positioning buyers to be very aggressive in M&A processes. We have seen a number of asset-acquisition opportunities emerge in the marketplace, which are being met with strong interest from potential buyers. So it will be a blockbuster year in terms of midstream M&A activity. Potential sellers are seeing that now is probably not a bad time to consider a monetization.”

Going forward, Casey says the opportunity set in front of companies is “incredibly rich” as the U.S. “re-plumbs” the country’s energy infrastructure because supply areas have “morphed over time.”

Citigroup was involved in a number of IPOs during 2010, including those for Plains All American Natural Gas Storage LP, Niska Gas Storage Partners LLC, Oxford Resource Partners LP, Chesapeake Midstream Partners LP and Targa Resources Corp.

“The Targa Resources Corp. IPO was especially interesting because it was a C-Corp transaction, not an MLP,” he explains. “The C-Corp structure demonstrated expanded investor appetite outside the traditional MLP investor universe. We saw investors, who had not historically been purchasers of MLP offerings, gravitate toward this as an opportunity to gain exposure to the MLP and midstream space. The same dynamic was seen in the Kinder Morgan Inc. IPO.”

While the activities and entrance of new investors bode well for the space, “there may be some headwinds,” he says, noting rising interest rates. “But we continue to believe that the strong growth fundamentals and investor interest in the MLP and midstream space will help keep these headwinds at bay.”

Center Coast Capital Advisors LP

Center Coast Capital Advisors LP, headquartered in Houston, is also focused on energy-related MLPs. Center Coast manages MLP assets with an investment process focused on due diligence from an owner-operator perspective.

The company was founded in 2007 at a time when institutional capital was flowing into the space and valuations were approaching all-time highs. As a result, the principals recognized a need to combine MLP operational experience with MLP investment-management experience to identify the highest-quality MLPs, believing that once institutional fund flows into MLPs slowed, there would be a bifurcation between the high- and low-quality MLPs.

“The MLP model is the absolute best way to afford this infrastructure, and it’s very exciting to the investors.” Dan Tutcher, co-founder and principal, Center Coast Capital Advisors LP

In January, Liberty Street Advisors Inc. launched the Center Coast MLP Focus Fund, an open-end mutual fund which strictly invests in MLPs, with Center Coast as the sub-advisor.

“The Center Coast MLP Focus Fund is brand new and growing. Other vehicles that we manage have $130- to $140 million of assets in the MLP space,” says Dan Tutcher, co-founder and principal.

“We don’t target a particular dollar amount for investment like a private-equity investor would. We look at investments as a percentage of a portfolio, because we strive for portfolio diversification and risk reduction,” says Robert Chisholm, senior portfolio manager.

The firm caps its maximum exposure in any one partnership at 10% of assets under management, but keeps on eye on the public float of those MLPs to ensure that it doesn’t have an excessively large position in any one MLP.

“We don’t want to be the largest holder in any one partnership, given the liquidity issues in the space. So we are mindful not to look at valuations alone. We also consider liquidity and how trading can affect our portfolio, which is somewhat a different angle,” says Chisholm.

Tutcher and Chisholm come from an operational background perspective, which, Tutcher says, is a lot different than most of the fund managers in the space.

“I have been involved in creating midstream assets all my life, for the last 35 years, and formed a company called Midcoast Energy back in the late 1980s. I operated it through the 1990s and sold out to Enbridge in 2001, because we were competing with so many MLPs and so many other marketing companies at that point.”

Previously, Tutcher was president of Enbridge Energy Partners during a time of significant M&A activity and when many new MLPs formed.

“When I retired in 2006, it was just because the MLP business and, in particular, the midstream M&A business, had gotten so rocky that it really didn’t make a lot of sense to move forward with M&A deals. About the same time, I met up with a couple of investment managers from Goldman Sachs—Steve Sansom and Darrell Horn. We started managing money in this particular space and investing in the names from a public perspective. That’s kind of how Center Coast got its start,” says Tutcher.

With this background, Tutcher looks at the investment process a lot differently than most money managers. “We look at it from a bottom-up perspective, which means that we really get behind the individual assets that are being held in these energy MLPs. We understand the cash flows associated with them.”

He also knows management teams well, including most of the operators of major MLPs that he once competed against.

“We tend to know whether or not, in an M&A opportunity for example, they overpaid or if they were realistic about values. That’s why we probably understand the midstream MLPs more deeply than most other money management teams out there, and that’s how we differentiate ourselves from the rest.”

“We look at investments as a percentage of a portfolio, because we strive for portfolio diversification and risk reduction.” Robert Chisholm, senior portfolio manager, Center Coast Capital Advisors LP.

Tutcher believes that billions of dollars will be required for new project buildouts during the next decade or so, and the MLP is a good model to work through.

“Unless something tremendously changes in the capital structure of these MLPs, that’s how they are going to be built,” he says. “The MLP model is the absolute best way to afford this infrastructure, and it’s very exciting to the investors. There’s new equity going into the market every day, and the investors just eat it up. The yield-oriented nature of this type of vehicle is wonderful. You’ve got a pretty insatiable appetite for yield on the market side, as well as reasonably inexpensive debt today.”

After being cautious and seeing the devastation of 2008, Tutcher says the firm was in a position to be more aggressive in 2009. “We were able to keep ourselves completely away from the weaker MLPs and the weaker midstream companies out there that had problems with their balance sheets, and banking problems and had cut their distributions or stopped them altogether.”

By 2010, the market was on the mend. Energy-related MLPs raised about $13 billion in equity capital, exceeding the amounts issued in each of the prior two years, according to Thomson Reuters Advisory Services.

“Going forward, we see the best names as the ones that are not only strong today, and have been strong in the past, but additionally those names that have large barriers to entry around their current assets. In other words, MLPs that have big footprints which can expand easily, thus making it difficult for other companies to build out in those areas. It’s especially important that they have great organic growth without having to grow with M&A.” Organic growth projects tend to be more profitable, and typically provide more bang for the buck.

Tutcher also looks for strong names with yields in the 5% to 6.5% range and “visible” distribution growth in the 6% to 8% range.

EnCap Flatrock Midstream

When it comes to investing in midstream wholeheartedly, the principals at a San Antonio-based firm do so with complete confidence, knowing that private equity looking for growth and a high rate of return in a recovering market will continue to do well in the midstream sector.

In 2008, Flatrock Energy Advisors LLC and EnCap Investments LP joined together in a long-term partnership to create a series of private-equity funds to invest in the midstream sector of the North American energy infrastructure space. The EnCap Energy Infrastructure Fund (EEIF) has institutional-investor commitments of some $791.6 million, managed by EnCap Flatrock Midstream (EFM).

“Our fund has a pure midstream definition; we invest 100% in the midstream space,” says EFM’s managing partner, Bill Waldrip. “We have invested in a number of pipeline projects along with several treating and processing facilities. Although we have not invested in storage projects to date, storage is certainly aligned with the objectives and definition of the Energy Infrastructure Fund.”

“We believe that over $10 billion per year will be spent on midstream infrastructure over the near term.” Bill Waldrip, managing partner, EnCap Flatrock Midstream

The firm has more than $1.2 billion of midstream equity under management, and expects this will increase along with commitments to new and expanding projects. According to Waldrip, typical commitments to new portfolio teams range from $50- to $100 million per company.

“Our first priority is always the selection of strong, experienced management teams that are aligned with our vision and objectives,” he says, noting that EFM also pays very close attention to market dynamics.

The firm’s investment philosophy is based in the understanding that midstream opportunities start on the upstream side.

“The first thing, outside of the management team, that we look for is a good supply base that has favorable upstream economics,” says Waldrip. “We believe that unconventional shale plays will dominate the market for some time to come. For every dollar spent on the upstream side, there will be 15 cents to 35 cents spent on midstream infrastructure required to get product to market. We believe that over $10 billion per year will be spent on midstream infrastructure over the near term. That’s a tremendous amount of opportunity.”

Encap Flatrock focuses on investments in start-up and growth-phase projects, particularly in the emerging shales.

“We are certainly focused on areas that we think are void of infrastructure to handle new production,” he says. “We also see a lot of places in the shale plays where there may be some existing infrastructure in place, but it may not have been designed or built to operate under conditions that really accommodate rapidly expanding drilling schedules and new production coming online in the area. We certainly like to make investments where we can see strong, viable growth opportunities.”

Yet, he contends, the path to development and eventual construction of this necessary infrastructure will be “a surprisingly tricky one,” depending on the economics of the market and the price of natural gas. Depressed prices are swinging producers’ focus to liquids-rich plays, and it could become a long-term trend.

“We’re seeing a lot of concentrated development in the midstream side in the rich-gas areas of the shale plays, including the Marcellus, Eagle Ford, Woodford, Granite Wash and the Niobrara. The areas that have liquids-rich gas associated with them are areas where upstream economics are favorable because liquids-rich wet gas requires even more midstream infrastructure. We are also positive about oil plays, including the Bakken and Avalon shale. Both are extremely active right now.”

Yet, the shift to liquids plays can present difficulties, Waldrip warns. The midstream industry is going to be somewhat challenged, during the next year or two, to build and accommodate that growing supply. Transportation and fractionation capacity will be essential to handle new liquid volumes, and there is a need to develop a market for those supplies as they mature.

Nonetheless, midstream build-out should continue during the next 10 to 15 years, he says. “We’re seeing new plays like the Marcellus and the Eagle Ford prove out in many areas, and there are still a lot of facilities to be built in those plays. It’s going to be a good place to be investing dollars for some time to come. The companies that get in early and establish a strategic position are going to have a significant advantage.”

Waldrip agrees with other capital providers that this is a prime time to be in the midstream space, even with gas prices as depressed as they have been. “We continue to see strong activities in core areas, and that’s going to continue. If prices improve, there will be even more areas that will have increased activity,” he says.

GE Energy Financial Services

So how much money are we talking?

According to Jim Burgoyne, managing director of natural resources for Stamford, Connecticut-based GE Energy Financial Services, “Total midstream investment is always a dynamic number, but I’d say, today, that of our $21 billion of assets across the energy spectrum and GE Energy Financial, we’ve got north of 10% of that in the midstream space, which includes distribution, processing, MLPs, storage and liquefied natural gas (LNG) facilities.”

GE Energy Financial invests in long-lived energy assets, including more than 30,000 miles of gas pipelines and thermal-power generation, wind, solar, biomass, hydro and other segments of the energy industry. The firm is more of an asset investor than a company investor, although it has the flexibility to do both, says Burgoyne.

“You’ve got to be focused, you’ve got to find your niches, and you’ve got to be able to create value and not get carried away. That’s a big challenge.” Jim Burgoyne, managing director, natural resources, GE Energy Financial Services.

“Our history would say that we typically invest from $25 million to $750 million. It really depends on the scope and size and nature of the investment, and of the transaction. It’s a fairly broad range.”

When considering investment targets, GE Energy Financial focuses on new and existing infrastructure that can thrive and be useful long term.

For GE Energy Financial, investing is a “very granular, ground-up process,” Burgoyne explains. “It’s all about the reserves. It’s all about the economics of those reserves. It’s all about where those reserves are going to go, in terms of how attractive new gathering or new pipeline systems would be, and then what kind of support do you have behind it.”

Burgoyne says, “I think 2009 to 2010 was a time of considerable transition, when you think about the financial crisis and how that slowed down activity overall. Many MLPs—which, at the time, we controlled one—were hurt by that period of rising yields and declining unit prices. The big thing I would point out is that there was a tremendous amount of construction and infrastructure going on in that period, as people looked to put in place take-away capacity out of the shales.”

At the time of the financial crisis, companies were selling assets and trying to raise money. Now that the capital markets are back, he thinks managers have a better handle on their balance sheets.

“I would argue that what I’m seeing now is more of an M&A trend in the industry, indicating that people are looking to consolidate some of what they’ve already done. You are starting to see assets change hands as people buy, sell and realign their portfolios.”

Meanwhile, gas drilling has reached a plateau, to some extent, according to Burgoyne. Since completion of the initial round of drilling to hold acreage, and with gas prices remaining low, there is a fair amount of deliberation going on as to how much more drilling producers want to do.

“I think that’s had some impact. Also, there are a lot of big projects completed, like what Energy Transfer Partners LP has done, and what we have done with Regency Energy Partners LP in the Haynesville. Activity is moving to new areas like the Marcellus, and to the Eagle Ford as the industry looks at liquids-rich drilling.”

GE Energy Financial, Regency and Alinda Capital Partners LLC (an independent private investment firm specializing in infrastructure investments) teamed up to form a joint venture to finance and construct Regency’s Haynesville Expansion Project, a North Louisiana pipeline that transports gas from the Haynesville shale play. GE Energy Financial partnered with Regency to raise new capital for the project, despite difficult credit conditions at the time. Despite the challenges, the project was completed in January 2010.

Now that initial shale construction projects are finishing up, continued strong rig counts indicate that this is just a short breather, says Burgoyne. GE Energy Financial plans to gear up for more.

“We can play on that in a couple of different ways. We still have a strong base of assets that people are interested in, that we can use to expand or create joint ventures to redeploy some of that cash flow. Also, a lot of the infrastructure in this country is quite old, and there will be some that needs to be replaced and expanded as this demand rises,” he says.

As the economy stabilizes, and markets remain dynamic, financial concerns need to be addressed. One of the biggest challenges will be capital discipline, according to Burgoyne.

“There will be a lot of liquidity in this space. Look how the yields of the MLP industry have come up to historical levels, if not better. We’re seeing a lot of bank lending at very aggressive terms. The question is, do people chase projects beyond what they should? Competition is going to be fierce. Obviously, when competition gets fierce, sometimes bad deals get done.”

GE Energy Finan- cial Services’ domes- tic midstream assets are widespread.

Companies need to focus on their ability to create value despite market challenges, he says. “You’ve got to be focused, you’ve got to find your niches, and you’ve got to be able to create value and not get carried away. That’s a big challenge. You’ve got to find good places to play,” says Burgoyne.

New construction should meet demand criteria, but finding the demand centers isn’t an easy task, he says. “After this tremendous surge in construction for the shales, I think that now the question is, what’s the demand going to be? Although some gas is economic at $3.50 or $4.50 or $5.50, I don’t think there is a producer out there that wouldn’t prefer to have higher prices.”

GE Energy Financial has investments in LNG, FERC-regulated interstate pipelines and gas distribution and transmission systems. “We still have a large investment in the Regency MLP, although we no longer control it. That is a company that we took control of, and significantly changed the focus of the asset base to extensively transform it to a largely fee-based business with a lot of transmission in it. The unit price has responded to that,” he says.

“We, as a company, believe that there is a tremendous need for new oil and gas infrastructure. It’s a business that we think is going to continue to grow, and provides the kind of opportunity to invest in essential, long-lived critical infrastructure that is our hallmark.”

EIG Global Energy Partners

On January 1, 2011, a new energy capital provider was born. That is, if you consider a group with $8.5 billion under management, and a 29-year track record, to be a new provider. EIG Global Energy Partners LLC (EIG), formerly the Energy & Infrastructure Group at Trust Co. of the West (TCW), announced its separation from TCW to become an independent investment firm in the global energy sector.

“We’ve completed over $1 billion in private-equity transactions in the past five years.” Kurt Talbot, co-president and chief investment officer, EIG Global Energy Partners.

Since 1982, EIG has invested solely in the energy sector, focusing primarily on upstream, midstream resources and power generation, but has also made a significant number of investments in the renewable space and energy-related infrastructure. EIG specializes in private investments in energy and has invested more than $11 billion in 32 countries on six continents.

“EIG plans to continue its sole focus of investing in global energy projects and companies. Its midstream experience and targeted investments include gas gathering, processing, treating, compression, storage, and LNG,” says Kurt Talbot, co-president and chief investment officer, based in EIG’s Houston office.

EIG has some $4 billion of available capital to put to work, and expects to invest up to 25% of that amount in the midstream sector.

“The biggest difference between EIG and other energy specialists is that we actively invest outside of the U.S., and we are willing to play anywhere on the balance sheet,” says Talbot. “We don’t need to buy your company. We are completely happy to provide financing. That said, we’ve completed over $1 billion in private-equity transactions in the past five years.

“In the U.S., the shale plays and other resource-like plays are clearly going to require additional gathering systems and processing facilities. With all the upstream activity, the midstream infrastructure is being overwhelmed in certain places.”

The firm is currently evaluating investments in natural gas gathering and processing in the Eagle Ford and Marcellus shale-gas plays, and gas gathering in the Haynesville shale, among others.

In 2009 the group purchased the Piñon gathering system from SandRidge Energy in West Texas for $200 million. The acquisition of the Piñon Gathering Co. LLC, an indirect wholly owned subsidiary of SandRidge Energy Inc., included some 370 miles of gas-gathering lines in the West Texas Overthrust in Pecos County, Texas. The system primarily serves the Piñon Field and moved more than 400 million cubic feet of gas per day.

“We liked that particular opportunity,” says Talbot. “It has somewhat of a captive market, with lots of resource potential behind it. The Piñon system includes gathering for both sweet gas and high-concentration CO2 gas.

“We followed that with a similar investment. This time, it took the form of financing a gathering system in West Texas that included two nitrogen rejection units. That has somewhat of a captive market and lots of resource behind the system, too.”

EIG is also taking a close look at financing new gas-processing facilities. “We have financed the acquisition of a number of operating gas plants in the past, but we are now considering constructing a couple of new plants. We are seeing increased demand for gas processing, owing to all of the upstream activity,” says Talbot.

Elsewhere, EIG plans to continue the firm’s major global investments. “Internationally, we have invested in and are considering additional investment in gas gathering and transportation in Australia, and LNG regasification and storage in Europe. We also see opportunities for stranded-gas plays in Asia and South America.”

EIG is selective when it comes to investments in service or technology companies. “We prefer to deal with tangible assets and projects. The tech and service sectors don’t suit our style as well,” explains Talbot.

EIG Global Energy Partners, like its predecessor TCW, expects about 70% to 80% of its investments to be in the form of mezzanine loans or preferred equity, with the balance common equity.

Tanglewood

Andrea Olsen-Condon is president and chief investment officer of Tanglewood, a private family office headquartered in Fredericksburg, Texas. Olsen-Condon has been in the private wealth management business for more than 25 years. Six years ago, she founded Tanglewood to provide investment and lifestyle management services to a small number of affluent client families in the Texas Hill Country, Houston and Dallas.

“Unlike the majority of financial advisors, I personally manage each client’s investment portfolio inhouse. We don’t use outside money managers or mutual funds. Our clients prefer to know who is managing their portfolio, what they own at any given time and, most importantly, why they own it. Because Tanglewood clients are primarily retired, high-net-worth entrepreneurs, they have a unique set of needs and concerns.

“Among these is the need for tax-efficient, risk-managed growth supplemented with varying amounts of passive income. This is where MLPs may offer a solution on all fronts,” says Olsen-Condon.

“The most distinguishing characteristic of MLPs is that they combine the tax advantages of a partnership with the liquidity of a publicly traded stock.” Andrea Olsen-Condon, president and chief investment officer, Tanglewood.

“The most distinguishing characteristic of MLPs is that they combine the tax advantages of a partnership with the liquidity of a publicly traded stock,” says Olsen-Condon. “The high yields, growth opportunities, tax advantages and liquidity feature make midstream MLPs attractive to the high-net-worth investor.”

As with all investments, however, risks are present. “First, there are business risks, such as pipeline ruptures and other disruptions. Secondly, MLPs typically have large debt so they can finance their projects. A rising interest-rate environment would negatively impact their bottom line. And, lastly, in a declining economy, less demand for oil and gas products would decrease the need for their transportation and storage, negatively impacting the fee revenues generated by MLPs.”

Olsen-Condon is an economist and portfolio manager, constantly immersed in what’s going on in the geopolitical arena and the impact it may have on the portfolios she manages. The economic upheaval of the past several years has been of historic proportion and much uncertainty remains, she says.

“For now, I am keeping the highest-quality MLPs that we purchased over the past year or so. If the economy continues its recovery, I will add more to the positions.”

She says that one advantage to a consistent distribution-paying MLP getting caught in a market downdraft is that distribution yield rises proportionately. New units purchased at a lower price will come with a higher yield. This can be especially helpful to investors seeking income in a declining economy with declining interest rates.

“The only thing to carefully watch is the economic health of the MLP and its ability to continue making cash distributions to its investors. At the same time, if our economy finds its footing and we continue a steady recovery, MLPs should perform well as the demand for energy rises with the improving economy,” she says.

The story for many of these investors remains one of cautious optimism. Until the economy’s waters settle, capital providers and midstream investors will continue to follow the midstream sector’s activity closely as they prepare to shake out the sails and journey into more profitable seas.