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Can investors use passives to play US shale gas market revolution?

by Elsa Buchanan on Aug 22, 2013 at 12:14

Can investors use passives to play US shale gas market revolution?

Much has been written about the resurgent US energy sector, but can investors play the shale gas revolution through passives?

Michael John Lytle, chief development officer at exchange traded product (ETP) provider Source, believes passive investments can enable investors to access the theme of rising production in the US.

He points to a survey by oilfield service firm Halliburton, which puts US energy sector recoverable reserves at between 500 trillion to 1,000 trillion cubic feet.

‘Within the next five years, the US is expected to hike its production to around 10 million barrels per day [from 7.5 million currently], and that gives us plenty of hope,’ says Lytle.

In May, Source launched its first exchange traded fund (ETF) linked to master limited partnerships (MLPs) in the US energy infrastructure sector. These are designed for investors looking for exposure to around 40 companies working in this specialist field, such as Enterprise Product Partners and Kinder Morgan Energy Partners.

The midstream MLPs own and operate many of the US’s core infrastructure assets, such as pipelines and storage facilities. They avoid the double tax bite associated with investing directly in the US due to their structure.

‘Through partial structural monopolies, MLPs typically generate excellent inflation-protected long-term returns and relatively high free cash flow generation. They can attract both investors seeking income and growth as they need future investments,’ Lytle explains.

Source’s ETF currently has $116.4 million (£74.43 million) assets.

Though Ben Seager-Scott, a senior research analyst at BestInvest, believes MLPs ‘could do fairly well for themselves’ because they are less dependent on commodity prices and are well positioned given the demand for infrastructure, he says issues remain.

‘For a start, these investments, due to their structure, are high yield assets, which could make them more sensitive to changes in interest rates than traditional equity investments. Also, as the US looks to tighten its fiscal belt, tax-advantaged MLPs could run a risk of losing this status in any tax reform.’

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