TPYP - TPYP: A Good Energy Pipeline Play

2023-11-13 10:27:42 ET

Summary

• Tortoise North American Pipeline ETF offers attractive total return potential in the energy infrastructure sector.
• TPYP provides tax-efficient access to the pipeline sector and has a diversified portfolio of 46 stocks.
• TPYP stands out among similar ETFs with its unique structure, lower expense ratio, and better performance.

Niche sectors such as energy infrastructure are an interesting space to focus on precisely because it doesn't tend to get much attention. Master Limited Partnerships can be particularly appealing for investors seeking a steady income stream, largely due to their considerable yields and consistent cash flows. When looking at potential investment options, the Tortoise North American Pipeline ETF ( TPYP ) is one fund that's certainly worth your attention.

TPYP utilizes a passive management strategy, with its primary goal being to replicate the total return performance of the Tortoise North American Pipeline Index?. As one of the world's largest consumers of energy, North America boasts a sizable pipeline network that TPYP offers exposure to. The fund presents an attractive total return potential within a historically defensive sector. In addition, its flow-through structure facilitates tax-efficient access to the pipeline sector.

What is a pipeline company?

A pipeline company is characterized as a firm that is either actively involved in the energy pipeline sector or has a minimum of 50% of its assets, cash flow, or revenue tied to the management or ownership of energy pipelines. The fund is more diversified than a pure MLP index, encompassing a majority in traditional MLPs and the remaining in energy-related corporations and LLCs. This broadens the exposure to currently include 46 stocks.

Investing in pipelines such as oil and gas infrastructure offers several potential benefits.

1. Stable Returns : Pipelines often operate on long-term contracts, which can provide consistent, predictable cash flows and returns to investors.

2. Geopolitical Influence : Pipelines have significant geopolitical importance, hence, investing in them can provide a certain degree of influence and control over critical resources.

3. High Demand : Fossil fuels like oil and gas still account for a large portion of the world's energy consumption, ensuring a consistent demand for pipeline infrastructure.

4. ETF Exposure : Investing in pipeline ETFs can provide broad exposure to the energy sector, offering diversification benefits.

There are risks of course, such as environmental concerns, regulatory changes, and the shift towards renewable energy, which can impact the profitability of such investments.

Detailing TPYP's Holdings

The top five holdings include:

1. Williams Companies Inc. ( WMB ) : As a prominent energy corporation, Williams is committed to bridging the gap between North America's substantial hydrocarbon resource plays and the expanding markets for natural gas and natural gas liquids (NGLs). The company owns and manages midstream gathering and processing resources, as well as interstate natural gas pipelines, playing a pivotal role in the energy infrastructure across the continent.

2. Cheniere Energy Inc. ( LNG ) : Primarily engaged in LNG-related businesses, owning and operating the Sabine Pass and Corpus Christi liquefaction facilities.

3. TC Energy Corp ( TRP ) : A major North American energy company, developing and operating energy infrastructure in Canada, the United States, and Mexico.

4. ONEOK Inc. ( OKE ) : A leading midstream service provider, owning and operating one of the nation's premier natural gas liquids ( NGL ) systems.

5. Enbridge Inc. ( ENB ) : A North American leader in delivering energy, operating the world's longest crude oil and liquids transportation system.

The biggest winner of these 5 has been LNG which has a 7.40% weighting in TPYP.

Cheniere Energy Inc. has performed well in the last three years due to several reasons:

1. Strong Demand : Cheniere Energy, as a leading exporter of liquefied natural gas, has benefited from strong global demand, particularly from Asia.

2. Robust Business Model : The company's long-term contracts for its LNG facilities have provided stable and predictable cash flows, which are attractive to investors.

3. Solid Financial Performance : Cheniere has shown consistent revenue growth and has been successful in reducing its debt, which has positively impacted its stock.

4. Strategic Investments : The company's strategic investments in LNG export terminals have positioned it well to capitalize on the growing global shift towards natural gas as a cleaner energy source.

5. Positive Market Sentiment : The overall positive market sentiment towards energy stocks in the context of rising oil and gas prices has also contributed to Cheniere's strong performance.

Sector Composition and Weightings

TPYP's portfolio composition is primarily concentrated in natural gas pipelines (55%), crude oil pipelines (16%), and local gas distribution companies (14%). The remaining portfolio is distributed among refined products pipelines (4%), gathering and processing (10%), and other (1%).

In terms of structure, the fund caps its MLP exposure to 18% to maintain its RIC-compliance and avoid taxes at the fund level. The remaining 82% of the portfolio consists of C-Corps/LLCs.

Peer Comparison

When compared to other similar ETFs, TPYP stands out due to its unique structure and composition. For instance, the ALPS Alerian MLP ETF ( AMLP ) and the JPMorgan Alerian MLP Index ETN ( AMJ ), are more expensive than TPYP. AMLP and AMJ both have expense ratios of 0.85%, while TPYP's expense ratio stands at just 0.40%.

TPYP has performed quite a bit better by comparison. Much of this has to do with the top 10 positioning and concentration. AMLP for example has significantly more concentration risk with the top 5 names making up a whopping 71% of the fund. It has less exposure to LNG, the combination of which largely explains relative underperformance.

Conclusion: Is TPYP Worth the Investment?

The Tortoise North American Pipeline ETF ( TPYP ) offers an attractive opportunity for investors seeking exposure to the pipeline sector. Despite the inherent risks associated with investing in a non-diversified and sector-specific fund, TPYP's broad exposure, tax-efficient structure, and lower expense ratio make it a compelling choice. The yield historically has been fairly solid, and is on the upper range now.

Moreover, the fund's ability to provide access to both traditional MLPs and energy-related corporations and LLCs adds another layer of diversification, potentially mitigating some of the volatility associated with investing in individual stocks. I like the fund. I think it's an appealing proposition for long-term investors seeking exposure to the energy infrastructure sector. Its unique composition, low expense ratio, and high yield potential make it a worthy consideration for any diversified investment portfolio.

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