April 2, 2012 - The Wall Street Transcript has just published Oil & Gas: Master Limited Partnerships Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Carl Kirst, CFA, is a Senior Research Analyst and Managing Director at BMO Capital Markets Corp. covering the North American pipeline industry, a sector that operates throughout the natural gas value chain. In recent years, Mr. Kirst consistently has ranked in the top three in the Greenwich institutional survey, twice runner-up in Institutional Investor's All-America Research Team, number one and number two in the 2011 StarMine (FT Thomson Reuters) award for best stock-picking and earnings estimates in the gas utility category, respectively, and was number one in The Wall Street Journal's 2011 Best on the Street in utilities. He has a B.A. from Rice University in economics and English.
TWST: What's your overall outlook on your coverage space right now and why?
Mr. Kirst: Overall, as we entered 2012, in our year ahead outlook, we basically took what you might call a cautiously optimistic tone from a stock standpoint. And what I mean by that is that all of the things that allowed the group to work so well in 2011 would continue to do so in 2012. The ongoing expansion of shale supply is by no means stopping, the shift over to NGL-rich supply sources continues, so you wind up with everything from long-haul transportation needs for natural gas and liquids, but also the actual midstream infrastructure side. And now increasingly, as shale technologies are being applied to oil, we have oil transportation opportunities. So you combine that with the fact that we are still in a 2% Treasury curve, both in the U.S. and Canada, the demand for yield, especially for companies that have yield plus growth, makes for a compelling investment.
In contrast, when you look at a traditional utility, be it gas or electric, it tends to have a very low, secular type of growth rate associated with it. Because of the demand for infrastructure, a lot of our names have some fairly strong growth trajectories attached to that dividend, and so in this kind of market starved for yield, that's something that continues to really lead to positive funds flow into the group. The reason why we have a cautious optimistic viewpoint, though, is that none of these trends are undiscovered or unknown. There is a reason why the average name in our 21 group universe was up about 35% last year. Our view is that the dynamics that propelled that last year will continue to propel this year, but make your expectations realistic.
If we wind up getting 10% total returns for the group, inclusive of dividends, in a 2% yield market, that might actually be pretty good, right? Don't get used to what we saw last year. Certainly, there are opportunities within the group to make more than 10%, we think, but the general feeling that we've had with the group is that it's a place you want to be, but it's not an unknown place, and so we want to make sure we are keeping our expectations realistic.
TWST: You mentioned the ongoing expansion of the shale supply and NGL supply. Please talk about what the key trends are for the industry right now, such as particular locations that are especially productive.
Mr. Kirst: It's sort of a difficult question to answer, because when you think across North America, each region has its own supply/demand constraints. I think we are going to continue to see a need for new infrastructure in the Bakken. We are going to continue to see new infrastructure from the Permian, as well as between Mont Belvieu and Conway. A lot of this infrastructure has been proposed and is expected to come on line in the next two to three years, but these are still the areas that are getting a great deal of attention, as well as, of course, something that's been dominating our media headlines for the last year - getting Western Canadian crude oil down to the U.S., I mean TransCanada's Keystone XL and the political football that's become.
But that's certainly not the only piece of infrastructure that is important to that dynamic. Whether it happens to be potential pipelines going to the West Coast, Enbridge's Northern Gateway, Kinder Morgan's Trans Mountain pipeline expansion - there are still more potential projects that could come. In fact, I was talking with an account earlier who was suggesting that Energy Transfer (ETE) and the newly purchased Southern Union (SUG), which hasn't yet closed but is shortly expected to, could do something like basically shut down one of the pieces of its trunk line, convert it from natural gas to oil and basically make a Midwest oil pipeline down to the Gulf Coast. There are a lot of different things that are being thrown at the wall by the industry to see what's going to stick, but there is still a great deal of infrastructure that's going to continue to be required. This is probably a year stale now, but I know INGAA - that's the Interstate Natural Gas Association of America - commissioned a study that looked at gas pipelines, midstream and oil pipelines, the whole gamut, and it's coming to roughly $10 billion of annual industry spending for the next 25 years. Now, whether in a sub-$3 gas market we are really going to need all of that makes this something of a moving target. Certainly, we've seen dry gas activity begin to peel back, and that might impact some infrastructure.
I can't reasonably sit here and tell you there is a need for a new natural gas pipeline anywhere in the country. I mean, basis is flat, which makes for probably the next three or four years, I think, a fairly dead driver for the industry, or at least a sleeping driver. I'm sure it will come back, especially with the need for future power generation. But right now, what's going to essentially be the bridge will be the oil infrastructure that's required, and most certainly the midstream and NGL infrastructure, which continues to be required, and you see everyone from the MLPs to the C-Corps participating in all of that. It is a highly competitive, robust market right now.
TWST: What are your top picks right now and why?
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