Energy Markets Update: Natural Gas
About This Video
September 2018. This video is the third in a 3 part series on timely issues related to North American energy focusing on Midstream Pipelines & MLPs, Energy Stock Valuations, and Natural Gas Demand Growth.
Energy Markets Update: Natural Gas

Hi, I'm Michael Roomberg, a portfolio manager at Miller/Howard Investments. This video is the third in a three-part series on timely issues related to North American energy focusing on Midstream Pipelines and MLPs, Energy Stock Valuations, and Natural Gas Demand Growth.

For nearly a decade Miller/Howard has expected natural gas, the cleanest burning fossil fuel, to displace coal and nuclear-fired power generation, both here and abroad. This transition is now accelerating globally, and the United States is now the fastest growing supplier of liquefied natural gas (LNG) to the world. LNG demand in China is currently growing at a 50% annual pace, as that country seeks to aggressively combat unsustainable air pollution in the face of insufficient domestic natural gas production.

Back home, this month provided a real-time example of how natural gas is not only a safe, more environmentally friendly power choice for the world, but one that makes economic sense as well. During September, the owners of the Vogtle nuclear power plant, the only nuclear project currently under construction in the United States, voted to continue to proceed with construction despite the fact that their project is already 10 years into a 7-year projected construction cycle, and is now $13B over budget, yet is only 40% complete. For the amount of money this project will now likely ultimately cost, America could build 15 times more natural gas–fired power plants than what will be added with this nuclear facility, in terms of capacity.

Coal is even less competitive, and of course much less environmentally friendly. So despite the political rhetoric to the contrary, monthly figures from the US Energy Information Administration show that coal consumption year-to-date continues to decline rapidly, and we are now using less coal in America than we did in 1983, despite there being 40%, or an additional 100 million, Americans today. Simply put, the demand growth story that Miller/Howard has long envisioned for natural gas remains entirely intact. And importantly for the world, global displacement of coal with natural gas, the cleanest burning fossil fuel, remains one of the most potent and scalable ways to reduce CO2 emissions.

Sources: US Energy Information Administration; International Energy Agency; utilitydive.com.

LNG: Liquefied natural gas is natural gas (predominantly methane, CH4) that has been converted to liquid form for ease of storage or transport.

MLP: Master Limited Partnership is a type of business venture that exists in the form of a publicly traded limited partnership. It combines the tax benefits of a partnership—profits are taxed only when investors actually receive distributions—with the liquidity of a public company.

© 2018 Miller/Howard Investments, Inc.

DISCLOSURE
Common stocks do not assure distribution payments. Distributions are paid only when declared by an issuer's board of directors and the amount of any distribution may vary over time. Distribution yield is one component of performance and should not be the only consideration for investment. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. The views expressed here represent Miller/Howard Investments' views and are subject to change at any time. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Past performance does not guarantee future results.

Risk Factors to Consider When Investing in Master Limited Partnerships (MLPs)
  • Cash distributions are not guaranteed and may fluctuate with the MLP's operating or business performance.
  • MLPs typically have a General Partner that maintains an aggregate 2% General Partner interest. Unit holders will have limited voting rights and do not own an interest in, vote with, or control the General Partner. The General Partner often cannot be removed without its own consent, and the General Partner has conflicts of interest and limited fiduciary responsibilities, which may permit it to favor its own interests to the detriment of unit holders.
  • The MLP may issue additional common units, diluting existing unit holders' interests.
  • Unit holders may be required to pay taxes on income from the MLP even if they do not receive cash distributions.
  • The IRS could reclassify the MLP as a taxable entity, which could reduce the cash available for distribution to unit holders.
  • If at any time the GP owns 85% or more of the issued and outstanding limited partner interests, the GP will have the right to purchase all of the limited partnership interests not held by the GP at a price that may be undesirable.

Tax Considerations of MLPs
The tax treatment for investors in MLPs is different than that of an investment in stock, including (a) the investor's share of the MLP's income, deductions and expenses are reported on Schedule K-1, not Form 1099, (b) because of the possibility of unrelated business taxable income, charitable remainder trusts should not invest in this strategy, and other non-taxable investors (such as ERISA and IRA accounts) should carefully consider whether to invest in this strategy, (c) investors may have to file income tax returns in states in which the MLP's do business and (d) MLP tax information is sent directly from the partnership, which generally has until April 15th to provide this information. You should discuss these and any other tax implications with your tax advisor.

DISCLOSURE
Common stocks do not assure distribution payments. Distributions are paid only when declared by an issuer's board of directors and the amount of any distribution may vary over time. Distribution yield is one component of performance and should not be the only consideration for investment. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. The views expressed here represent Miller/Howard Investments' views and are subject to change at any time. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass. It is not possible to invest directly in an index.

Past performance does not guarantee future results.

Risk Factors to Consider When Investing in Master Limited Partnerships (MLPs)
  • Cash distributions are not guaranteed and may fluctuate with the MLP's operating or business performance.
  • MLPs typically have a General Partner that maintains an aggregate 2% General Partner interest. Unit holders will have limited voting rights and do not own an interest in, vote with, or control the General Partner. The General Partner often cannot be removed without its own consent, and the General Partner has conflicts of interest and limited fiduciary responsibilities, which may permit it to favor its own interests to the detriment of unit holders.
  • The MLP may issue additional common units, diluting existing unit holders' interests.
  • Unit holders may be required to pay taxes on income from the MLP even if they do not receive cash distributions.
  • The IRS could reclassify the MLP as a taxable entity, which could reduce the cash available for distribution to unit holders.
  • If at any time the GP owns 85% or more of the issued and outstanding limited partner interests, the GP will have the right to purchase all of the limited partnership interests not held by the GP at a price that may be undesirable.

Tax Considerations of MLPs
The tax treatment for investors in MLPs is different than that of an investment in stock, including (a) the investor's share of the MLP's income, deductions and expenses are reported on Schedule K-1, not Form 1099, (b) because of the possibility of unrelated business taxable income, charitable remainder trusts should not invest in this strategy, and other non-taxable investors (such as ERISA and IRA accounts) should carefully consider whether to invest in this strategy, (c) investors may have to file income tax returns in states in which the MLP's do business and (d) MLP tax information is sent directly from the partnership, which generally has until April 15th to provide this information. You should discuss these and any other tax implications with your tax advisor.