Most investors experience booms and busts over their careers. Tyler Rosenlicht, now 33, experienced euphoria and panic in two different sectors over his first decade on the job.
There was the financial crisis, during which time Rosenlicht worked as an investment banker focused on real estate. Then he joined Cohen & Steers as an analyst covering energy when the hydraulic-fracturing boom started driving up prices of master limited partnerships, or MLPs, which store, transport, refine, and market oil, natural gas, and gas liquids—all of which are known as “midstream” businesses.
A few years later, he became a co-manager of the $164 million Cohen & Steers MLP & Energy Opportunity fund (MLOAX) just in time for oil prices to collapse. The fund, which Rosenlicht manages with Robert Becker and Benjamin Morton, dropped 39% in 2015. It has since recovered and ranks in the top quartile of its Morningstar energy limited partnership category in the years since, and is beating 88% of its peers over the past three years.
“The two things that really matter for midstream companies are energy volumes and counterparty risk,” Rosenlicht says, since most midstream companies have long-term contracts with energy companies. “In 2015 and early 2016, both of those were being called into question; volumes declined, and there was concern over energy concerns going bankrupt and those contracts being ripped up and thrown away.”
Today, Rosenlicht says, we’re in the midst of another tectonic shift. “We’re seeing a dramatic reshaping of North American energy infrastructure,” he says. “We’re going from a place where we thought we would need to import all of our oil and gas, to a place where we will be a net exporter in the not-so-distant future.”
The companies themselves are also in the middle of change, as many of the biggest names are changing their structure to what Rosenlicht calls MLP 2.0. The first generation of midstream oil companies typically comprised at least two entities: a limited partnership, which owns the assets, and a general partner, which operates the MLP. “That model worked really well for a long time, but it isn’t sustainable,” says Rosenlicht. Among other issues, traditional MLPs are incentivized to distribute all available cash to investors, meaning that it must raise funds or take on debt to fund new projects.
Now, midstream goliaths are rolling up operations into single entities, improving governance, and leading boards to take a long-term view on how they manage assets and cash flow. Among the fund’s top 10 holdings—which account for nearly 59% of assets—all but one have moved to the new model or are in the process of doing so. (Because of MLPs’ unusual structure, most mutual funds, Rosenlicht’s included, hold no more than 25% of assets in them.)
One example is Kinder Morgan (KMI), the fund’s largest holding. Kinder, which owns and operates more than 80,000 miles of pipelines in North America, rolled itself into a single entity in late 2014. “They are truly a free-cash-flow-generating business, and are unique in that they’re one of the few companies in the midstream universe currently buying back stock,” he says.
While MLP investors have traditionally focused on yield, Rosenlicht and his team look at net asset value, or what a business would be worth if sold for the sum of its parts at fair market value. Kinder, like many of its peers, is trading below NAV, he says. Private-equity funds have been buying midstream companies at 12 to 13 times earnings before interest, taxes, depreciation, and amortization, while public markets are pricing them at 11 times Ebitda.
This strategy is guided by top-down decisions from the firm’s Best of Energy group, or BOE, which also stands for barrel of equivalent. Twice a month, Rosenlicht and 15 analysts and managers covering commodities, resources, and other energy areas, gather to form a singular view on global energy.
Their current thesis: The dynamics that hurt midstream companies a few years ago have essentially flipped. Population growth coupled with strong economies around the world are driving energy use, but, as a consequence of the downturn, new projects have been slow to come online.
Enterprise Products Partners (EPD) is benefiting from such a bottleneck. The company, which adopted the single entity model in 2011, owns and operates infrastructure that effectively takes natural gas “from the wellhead to the dock,” says Rosenlicht, who has been building the position since early 2018. Of particular value, is EPD’s ability to fractionate natural gas liquids (NGL) into different products. Ethane, he says is in high demand, and processing plants can’t keep pace. Consequently, the price of ethane per gallon has more than doubled. The stock recently traded at $28 a share versus what Rosenlicht pegs as a mid-$30s fair value.
While the fund invests exclusively in midstream companies, different business models work better in different environments; for example, some are more or less immune to oil-and-gas price changes, while others are correlated. Likewise, some midstream players are better positioned to benefit from a shift to exporting U.S. energy products, as opposed to importing.
Case in point: Cheniere Energy (LNG), which specializes in liquefied natural gas for exporting and re-gasifying LNG for importing. The company was set up to convert imported gas but successfully pivoted its operations to liquefying gas for export. “They were a first mover,” says Rosenlicht, noting that this is a significant advantage, given the high cost and time needed to get facilities operating.
The BOE group saw the potential for exporting U.S. energy, prompting Rosenlicht and his team to build a position in Cheniere through 2016. The stock recently traded near $60, but the midstream team still sees incremental upside, particularly when factoring in future projects.
Cheniere is also unusual because it doesn’t pay a dividend, reinvesting its free cash into new facilities instead—and building long-term value for shareholders.
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