Four Hot Energy Infrastructure Plays

James J. Cunnane Jr., CFA, Managing Director and Chief Investment Officer, and Quinn T. Kiley, Managing Director and Portfolio Manager, MLP and Energy Infrastructure, Advisory Research Investment Management

James Cunnane: We are the MLP (master limited partnership) and energy infrastructure team of Advisory Research Investment Management. Our 13-person team is located in Saint Louis, Missouri where we manage approximately $5 billion of MLP and energy infrastructure assets.

Wally Forbes: Energy is your concentration?

Cunnane: Energy Infrastructure is our absolute concentration. We have a team that has built up a track record over the past 18 years, which is the longest track record among MLP managers.

We're talking about pipelines and gathering systems and storage tanks and other energy infrastructure assets that are critical to the function of the U.S. economy. And we think that investment in them is an excellent way for investors to access a couple of key traits. First, when you invest in the energy infrastructure you tend to invest in assets that have a high level of current yield. Second, they have some growth. They tend to be great diversifiers when added to traditional asset classes. And they also can have some tax advantages. So, when you invest in energy infrastructure, you get a nice set of characteristics that, in our mind, is unique from what's available in most other liquid asset classes.

That's why people have found energy infrastructure investing to be productive over time. One way to invest in energy infrastructure is via master limited partnerships, or MLPs. These are publicly traded partnerships, which, from an investment standpoint, act very much like an investment in a corporate equity.

But they are actually an investment in a partnership and, therefore, generate a K-1. Now, there are some other ways to access the energy infrastructure and MLP asset class without a K-1, specifically via an open-end or closed-end mutual fund. One mutual fund that our group offers is the Advisory Research MLP & Energy Income Fund, which has the ticker INFIX.

Forbes: Is it also a K-1 situation?

Cunnane: That's actually an IRS-1099 fund. It's a way for an investor to access an MLP or energy infrastructure investing, but do it with the 1099, which is very desirable. The nice part of that approach is that the fund delivers the investment characteristics that people are seeking when they invest in MLPs such as the higher yield, the growth potential, the diversification, the liquidity, but does it with a little less volatility and with the 1099, which is a really great benefit to investors.

Forbes: Let me ask you another question. You were talking about the energy environment being a good solid place to invest at this point. Has the whole new world of oil shale development opened some further opportunities that are within the area that your kinds of investments also can benefit from?

Kiley: Sure. If you think about the energy universe as a whole, our entire economy stands on the shoulders of the energy industry to deliver energy for electricity, transportation, and petrochemicals. Most of our economy stems from those activities.

Today, a lot of historically nonproductive oil and gas plays are now very economical. And, so, you're seeing a growth on the supply side — which we haven't seen in the last 15 or 20 years. That means an increase, not just a stable demand for what MLPs do and what the energy industry does, but now, an increased supply.

And that means there's more volume out there for energy infrastructure to handle and to store and to transport. And that means you have a higher demand for their existing infrastructure and you have an increased demand for new infrastructure. That's, really, what MLPs and energy infrastructure companies that we invest in are trying to do, is grow the value of what they own and grow the size of the asset base in which they operate.

Forbes: Sounds terrific.

Cunnane: And one other very exciting thing about MLPs and energy infrastructure is that it is one of the few parts of the economy today that is really in a growth mode. That growth is coming from the sources of new supply that Quinn referenced and the need to get that supply to market.

MLPs and energy infrastructure companies are building the assets that deliver that energy to the market. They are capturing that growth opportunity and passing it along to investors in the form of a quarterly distribution. So, they're delivering to investors right now not only a high yield, but also a growing yield. It's tied to this expansion of U.S. oil and natural gas supply. And that supply is going all the way from feeding the U.S. economy to conversations about LNG and crude oil export, which is a potential growth opportunity as we move forward.