MLPs Are Pumping Billions Of Dollars Into Energy Infrastructure To Meet Demand, Making Them A Strong Investment Opportunity, Says Managing Partner Of Swank Capital In This Exclusive Interview
January 30, 2012 - The Wall Street Transcript has just published Investing in Master Limited Partnerships and Other Investing Strategies Report offering a timely review of the General Investing 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.
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Jerry Swank is the Founder and Managing Partner of Swank Capital, and he has 35 years of experience in investment management and investment analysis. Prior to founding Swank Capital in 2000, Mr. Swank was President and CEO of John S. Herold, Inc., a 50-year-old independent oil and gas research and consulting company. Mr. Swank holds a B.A. in economics from the University of Missouri and an MBA from the University of North Texas. He has served on the board of directors of John S. Herold, Inc., Matador Petroleum and Advantage Acceptance, Inc. He currently serves on the board of E-T Energy Ltd. and Central Energy, L.P.
TWST: Since your focus is on MLPs, in 2012, considering the state of the markets and the macroeconomic environment, what do you believe are the most compelling reasons to be invested in MLPs at this point?
Mr. Swank: It is interesting. We're just writing our year-end letter today and writing our outlook for next year. I think that people are - that because of those things you said, there is a lot of scarcity out there of high-quality earnings growth, predictability and consistency in income. Income is the scarcest commodity, and MLPs give you all those things, amazing past record of distribution in terms of dividend growth by owning U.S. energy infrastructure. So the fundamentals of the business are as strong as any business we see on the planet now, and the consistency and the yield compared to other yield vehicles stands out. So I think that's why you should own these things.
TWST: Which segments of the energy industry do you find most interesting at the moment?
Mr. Swank: It's really interesting. Our teams are really unchanged since a year ago, and so for 18 months now we have wanted to be involved in the midstream companies, the pipelines, the companies with pipelines and terminals and storage facilities that are engaged primarily in the oil business, not the natural gas business, and also in the natural gas liquids business. What that means is when oil - when gas comes out of a natural gas well, there are liquids in it, and you take those liquids, and from that you can make natural gas liquids, which are ethane and propane and butane. And those things tend to have - are correlated to oil, and so there is a huge demand for those products. The thing is that the oil and natural gas liquids are growing dramatically in United States, and we don't have enough infrastructure in the correct places, so our MLPs are spending hundreds of billions of dollars to put in new energy infrastructure in pipelines, processing plants, terminals and storage facilities to get the natural gas liquids and oil to the correct markets. So the beneficiaries of that are kind of the holy trinity of the natural gas - of the liquids business, we call it - and that's Enterprise Products (EPD); ONEOK, and there are two companies, OKE and OKS; and then Targa; and again, there are two entities there, one is NGLS and the other is TRGP. Both of those, one is the general partner and the other is MLP, and they're both publicly traded. So those are very good plays in the natural gas liquids business. The oil business, names like Plains All American (PAA) is right in the middle, Sunoco Partners (SXL) and Magellan (MMP), have been very good performers in that space as well.
TWST: Conversely, in which segments of the energy industry are you fairly uninterested in at this point and why?
Mr. Swank: There are two areas, two segments that continue to deplore, and that would be the natural gas storage business - and that's because there is so much gas around us, there is no money to be making storage business - and also the propane business; the retail propane business has a fairly tough environment.
TWST: In your last interview with us, in May 2010, you said that you take a bottom-up approach to figuring out which companies are going to have the best growth rate. Would you elaborate on that and give us more insight into your research and investment strategies?
Mr. Swank: What we try to do really is, you see, we have these themes, which is kind of overlaying. But what happens from the bottom-up, it almost always matches up. In fact, the companies that we end up having the best growth rate actually usually match up with the themes, except for a couple of instances. So we take a company like Enterprise Products, we obviously have their basic business fairly well modeled, but every time they announce a new acquisition or a new project, we load that in, and so we are able to fairly well model into new projects their $200 million - and so we just can add that to the base business and get a very good handle of what the potential distribution growth is going to be and how long that's going to happen. And then there has been a lot of activity, and so there is not only that, there has been decent M&A market companies buying a lot of assets from E&P companies and from old majors, like Conoco (COP) and BP (BP). And so we're trying to find out exactly how those assets, how they can hook up with existing MLPs, existing infrastructure, what economies of scale, what commerciality can they bring to the party. And so where it might look on the surface you're paying 10 times, when we go to see what's happens, sometimes we find out there is a lot of earnings you're going to make and maybe you're only paying six times for it. And then another example, which is completely away from these themes, our best stock last year was an E&P MLP, which is exploration production called EV Energy Partners (EVEP); a nice company, we knew them well, fairly hedged with commodity priced sensitivity, but has turned out, they have some acreage, but they had already conventional natural gas production in the Utica shale of Ohio, which is right behind Marcellus. It has turned out it is going to be one of the hottest shale plays ever. They had a bunch of acreage in which Chesapeake (CHK) is the biggest player, started buying acreage there last year. We know Chesapeake - we thought it was worth $3,000 or $4,000 an acre, as we kept hearing and doing our research and kept seeing test results get better and better, and so we got $15,000 value. In December, Chesapeake, they had sold a joint venture and put $15,000 an acre value on EPs, reserves there, and the stock is in mid-$60s, and with that kind of valuation you kind of get $100 kind of value. So EV has said, I think, that $15,000 is their floor, and now they're doing some more drilling and will monetize investments in second and third quarter. And we think most likely that EV will trade this acreage - they hardly have any production at all; it's a major and they will get a whole bunch of production cash flow to the tune that they'll be able to raise the current distribution of 70% to 100%. So it is a kind of research we do as well.
TWST: Is there a stock you sold recently that you believe illustrates your sell discipline in general?
Mr. Swank: A company like SXL, Sunoco, is a great company, made a lot of money, but the stock has gone up so much, 25%, 30% last year. And we brought it at yields of 7%-plus, and today it yields 4.3%. So we think we've generated most of the upside off of the stock. Even though we love the company, we just think its price performance from here is going to be pretty muted.
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