Postcards: There's Always Money in the Midstream

The center of the energy supply chain is rich with companies with strong yields, appreciation upside, and booming demand into the next few decades.                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more [Postcards: There's Always Money in the Midstream]( The center of the energy supply chain is rich with companies with strong yields, appreciation upside, and booming demand into the next few decades. [Garrett {NAME}]( Nov 1   [READ IN APP](   Dear Fellow Expat: When I first broke into the financial publishing industry, I had the good fortune of working with Dr. Kent Moors. Dr. Moors was one of the most knowledgeable energy experts I’d ever met. He had an incredible understanding of geopolitical tensions and the key players across the global energy supply chain. He’d regularly write about his travels around the world - consulting for foreign governments in the energy patch or attending political summits under Chatham House Rules. One story that I edited of Kent’s has stuck with me for the better part of a decade. It was an article recommending [Cheniere Energy (LNG)]( in 2011 when shares traded under $10. (Shares are now at $168.00). I remember the story headline we agreed upon… It read: “There’s Always Money in the Midstream.” And it was as true in 2011 as it is today. [Upgrade to paid]( The Cash Rich Midstream The “midstream” is the center of the energy supply chain. Companies in this space engage in the transportation of crude oil and natural gas from “upstream” production fields to “downstream” refineries and other locations. The companies that move crude and natural gas do so through pipelines, railroads, tankers, and trucks. Pipelines are the most common and cost-effective method, while tankers are used for long-distance and offshore transport. Of course, it’s not just about moving crude. Storage is also very critical, as companies need to keep plenty of crude available in tanks and other facilities to ensure that crude is constantly moving to our refineries. For example, in the South, there is a vast pipeline and storage network connecting production fields in the Permian Basin to Cushing, Oklahoma and ultimately to the refinery network along the Gulf Coast of the United States. But that’s just a sliver of the U.S. system. Source: American Petroleum Institute In the U.S., there are more than 190,000 miles of liquid petroleum pipelines carving across the landscape. In natural gas, the mileage surges to roughly 2.4 million miles. Companies are paid to move crude through their pipelines or store crude at their facilities. And given that the global oil supply chain moves through about 100 million barrels of crude a day, the midstream is very busy - and very lucrative. Midstream energy companies receive compensation through a variety of revenue streams and fee structures. This income is largely generated in transportation, storage, and processing of oil, natural gas, and other energy products. The specific compensation methods can vary based on the type of midstream services they offer and the contracts they have with producers, refiners, and other customers. In addition, many midstream companies enter into long-term contracts with producers, refiners, and other customers. Such contracts ensure stable revenue streams, and typically include fixed fees or take-or-pay arrangements. These revenue streams help offset the impact of oil and natural gas price volatility. [Upgrade to paid]( Why Master Limited Partnerships Rock If you’re looking to get involved in the energy midstream, it’s important that you also understand the importance and value of Master Limited Partnerships. Although publicly traded, MLPs are effectively an alternative investment in the energy space. These companies are structured differently than traditional corporations, and typically operate in the midstream sector of natural resources. MLPs are unique because of their ownership structure and their tax advantages. The structure of the MLP is one of a pass-through entity, which bypasses taxation at the corporate level. Instead, the company “passes through” income derived from its services to individual investors, who then declare their earnings as ordinary income at tax time. The one downside of MLPs is that they do require the filing of a K-1 at tax time, so it’s very important that investors stay on top of their reporting. As an investor, you’re not buying “Shares.” You’re buying “units” in the partnership, and retail investors are considered “limited partners” or LPs. The general partners are the ones responsible for managing the company and its operations. Since the MLPs must distribute a large amount of its income to limited partners, the distributions of these midstream companies can be quite robust - especially given the ability to bypass corporate taxes. Investors can find yields north of 8% - and even 10% - depending on the company and the cash flow. Getting Started A few places to start in the MLP space include Energy Transfer (ET), a large American energy company specializing in pipelines, natural gas and crude oil storage, and related infrastructure. The company has a $41 billion market capitalization and 125,000 miles of pipeline and transfers about 30% of U.S. natural gas production. One of the appealing parts of ET in 2023 is that its Chairman engaged in one of the largest insider buying sprees of the last 12 months. Kelcy Warren purchased nearly $150 million in company stock in the last year, according to SEC Form 4 documents. Meanwhile, keep a very close eye on the ClearBridge Energy Midstream Opportunity Fund (EMO). This is a closed-end fund that owns a large number of MLPs and other midstream assets. It also owns one of my favorite midstream names in Enterprise Product Partners (EPD). Source: CEFConnect.com The fund trades at 13.5% discount to its net asset value (NAV) and pays a gross yield of 8.35%. This fund doesn’t require a K-1, even though it does own a lot of MLPs. In addition, this fund has been on my radar thanks to massive amounts of buying by Boaz Weinstein at SABA Capital. Weinstein has bought more than $36 million in EMO in the last 12 months. Calling It a Day It was true in 2011… and it’s true today. There’s always money in the midstream. We know that oil will remain a dominant form of energy over the next few decades, regardless of what the alarmists claim. Look to the pipeline stocks as a consistent source of yields, and watch the insiders. Big insider buying campaigns in this space are a sign of confidence. Tomorrow morning, I’ll go deeper into the recent insider buying that has captured my attention in [the Republic Risk Letter.]( [Upgrade to paid]( Stay positive, Garrett {NAME} Secretary of Defense You're currently a free subscriber to [Florida Republic Capital](. For the full experience, [upgrade your subscription.]( [Upgrade to paid](   [Like]( [Comment]( [Restack](   © 2023 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()