Midstream infrastructure: The best segment for energy investing

 In Insights

Many accredited investors turn to energy MLPs (Master Limited Partnerships ) when looking for an attractive diversification play that can generated tax-advantaged income and capital appreciation.

However, those new to energy investing need to understand that not all energy MLPs are created equal.

One primary difference among energy MLPs, whether public or private, is which segment in the energy value chain they focus on. Broadly speaking, energy MLPs typically focus on one of three segments, or locations, within the energy supply chain:

  • Upstream
  • Midstream
  • Downstream

Here’s an overview of each, and what the Strategic Pipeline Income Fund focuses on.

Energy supply chain


Upstream: oil and gas natural production

Upstream companies identify, extract or produce raw materials. Their primary activities are exploration, drilling, and production. They also conduct offshore activities.

This is a capital-intensive segment that poses an array of risks that can impact investment performance when included in a fund. Some of these risks include

  • Onerous regulatory requirements,
  • Unanticipated environment concerns,
  • Geological surprises during exploration, and
  • Volatility in prices for oil and gas.

Midstream: Processes that create a marketable product

Midstream companies focus on gathering, storing, and transporting of oil and natural gases. Consider the midstream company as a middleman between upstream and downstream activities, which we describe in the next point.

This enviable position as the “connector” affords companies operating in this sector to become “toll collectors”. This is because they are making money based on the storage and transportation of the fuels. These companies are insulated from commodity price volatility and the risks that are inherent in exploration and development.

“Steady incomes that are growing” is how the investment team at the Strategic Pipeline Income Fund likes to describe these companies.

Downstream: Bringing product to the consumer

Downstream is considered activities that occur postproduction and bring the product to a wide-range of consumers. Companies serving the downstream market include major oil refineries, petroleum product distributors, petrochemical plants, natural gas distributors, and retail outlets. They serve a wide breadth of consumers including:

  • Power generation
  • Commercial
  • Refining
  • Industrial
  • Transportation
  • Residential

Most companies operating in the downstream market are end users.

Why we believe midstream is the best investment opportunity

The Strategic Pipeline Income Fund exclusively focuses on the midstream sector. The Fund manager believes this is the most attractive segment for investment because of its predictability of cash flows, low risk, and high potential for appreciation. We anticipate this appreciation will result from the massive build out of North American energy infrastructure that’s required to meet unmet consumer demand. More than $800 billion, or $44 billion per year, in midstream infrastructure investment is needed in North America by 2035 to meet U.S. and Canadian energy demand. This provides significant long-term investment opportunities that the Strategic Pipeline Income Fund plans to capitalize on.

Read the Fund’s Investment Summary to learn more about how the Fund can fit into your investment portfolio.

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