U.S. Energy: Game-Changing Growth
Average annualized spending. Source: U.S. Bureau of Economic Analysis, as of 1/1/13.
- Outlook 2014
- U.S. and Europe: Slow and Steady
- China: Consumers Keep Spending
- Fixed Income: Options for a Low Rate World
- U.S. Energy: Game-Changing Growth
View 2014 Market Outlook
- The U.S. energy revolution is gradually transforming the U.S. economy.
- To keep up with production, the U.S. needs to significantly expand its energy infrastructure.
- MLPs are a compelling investment option for investors looking to invest in U.S. energy.
The revolution in U.S. energy remains under way, with massive domestic shale oil and gas resources positioning the country to become the top global energy producer in fairly short order. We believe the effects of the boom will continue to reverberate throughout the economy in 2014 and beyond, especially within the energy infrastructure space. This space (among other energy-related sectors) should continue to provide potentially fertile ground for investors.
In 2012, daily crude oil production in the U.S. rose by a million barrels, representing the largest annual production increase in U.S. history.1 The gains continued in 2013, with natural gas production following a similar path. By 2015, the International Energy Agency estimates, U.S. crude oil production will surpass that of the current top producer, Russia, with the U.S. reaching energy self-sufficiency by 2035.2
The U.S. energy revolution is gradually transforming the U.S. economy and could help boost U.S. growth over the long term by reducing the trade deficit and lowering costs for manufacturers and consumers. To keep up with steadily increasing production, however, the U.S. needs to significantly expand its energy infrastructure, including the "midstream," or transportation and storage, component. This expansion is already well under way. Between 2000 and 2012, investment in extraction-related infrastructure grew eight times faster than overall infrastructure spending, but much more investment is still needed--perhaps $250 billion worth or more, on midstream infrastructure alone, by 2035.3
Source: U.S. Energy Information Agency, as of 6/30/12.
With pipelines already the dominant and most efficient mode of transporting oil and natural gas domestically, master limited partnerships (MLPs) with a focus on energy are likely to remain key beneficiaries of this investment boom; significantly more capacity in the face of rising production could continue to translate into higher revenue streams for such firms over a long period. This very dynamic was largely responsible for MLPs' 8% average annual distribution growth between 2001 and 2012.4
Although pipeline MLPs have grown somewhat more expensive in recent years as markets have increasingly recognized their value, many continue to pay highly competitive yields in addition to offering growth potential. MLPs appear even more compelling in light of their favorable tax treatment and the fact that their performance has historically exhibited a very low correlation to rising benchmark interest rates.
Source: U.S. Energy Information Agency, as of 6/30/12.
1. BP, "Statistical Review of World Energy 2013."
2. Bloomberg News, U.S. to Be Top Oil Producer by 2015 on Shale, IEA Says, November 12, 2013.
3. ICF International for the International Natural Gas Association of America (INGAA) Foundation, 2011.
4. Barclays Research estimate via Salient, as of December 31, 2012.
Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Each Fund's investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds.
The Oppenheimer SteelPath MLP Funds are subject to certain MLP tax risks. An investment in an Oppenheimer SteelPath MLP Fund does not offer the same tax benefits of a direct investment in an MLP. The Funds are organized as Subchapter "C" Corporations and are subject to U.S. federal income tax on taxable income at the corporate tax rate (currently as high as 35%) as well as state and local income taxes. The potential tax benefit of investing in MLPs depend on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation, its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution which could result in a reduction of the fund's value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV and as a result a MLP fund's after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.
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