The strategy for the four MLP funds focus on identifying primarily U.S. midstream master limited partnerships (MLPs) that have strong projected distribution growth, or the greatest potential for significant upward revaluation, seeking to provide an attractive risk-reward balance for investors.
The SteelPath investment team’s conservative investment style seeks to uncover MLPs that offer low underlying business risk and attractive total return potential in order to focus on those entities that we believe have the most attractive risk/reward balance.
- Employs a bottom-up approach to selecting energy MLP securities
- Majority of targeted MLPs operate toll-road business models (do not take title to commodity).
- Market comps: Price/distributable cash flow, Debt/EBITDA, Enterprise Value/EBITDA, Coverage ratio.
- Utilizes rigorous proprietary modeling and analytical techniques to understand MLP valuations and risks.
- Seeks to invest in MLPs with proven management teams and asset footprints positioned to result in future attractive growth opportunities.
The risk management process is embedded in the investment approach and process described above. Here are the fundamental and market risks that could affect the fund:
Disruption of Supply: A long-term supply disruption caused by geopolitical events abroad which could negatively impact crude oil imports, thereby hampering shipping, storage and processing volumes.
Legislative: The threat of tax law change removing the “pass-through” nature of MLPs.
Regulatory: Laws enacted which would ban the use of hydraulic fracturing, which has been the major technique used to extract large volumes of crude oil, natural gas and natural gas liquids domestically. A change in methodologies related to FERC tariff adjustments.
Capital Markets: The inability of MLPs to access capital markets to raise assets through the issuance of equity and debt securities.
Headline: MLPs occasionally trade down with other energy related securities given investor perceptions that MLPs will be fundamentally affected by changes in underlying commodity weakness.
Appetite for Risk Assets: When market sentiment is risk averse, equity security allocations (including MLPs) tend to be reduced.
Interest Rate: A rise in interest rates could make other income producing securities attractive and cause investors to favor other yield oriented instruments. Secondarily, a sudden spike in interest rates could cause investors to flee, fearing pricing pressure on yielding securities.