2023-12-07 11:37:15 ET
Summary
- Neuberger Berman Energy Infrastructure and Income Fund Inc allows investors to include midstream master-limited partnerships in tax-advantaged accounts.
- The fund has a reputation for being one of the best midstream funds and has performed well compared to its peers.
- While the fund's performance has not been impressive recently, it still offers a high yield and diversification in the energy infrastructure sector.
- The fund currently boasts a 10.20% yield that it appears to be fully covering year-to-date.
- The fund is trading at a very attractive discount on net asset value, which presents an appealing entry point for anyone who wants to own this fund.
Neuberger Berman Energy Infrastructure and Income Fund Inc ( NML ) is a closed-end fund, or CEF, that allows investors to include midstream master-limited partnerships, or MLPs, in their tax-advantaged accounts without running into potential problems at tax time. This can be a very good thing, because the financial stability and high yields of midstream partnerships make them very attractive investment vehicles for anyone who is seeking to earn a high level of income in retirement. As most midstream companies have very high yields, we can probably expect that this fund would also have a high yield. This is indeed the case, as the fund’s 10.20% current yield is higher than that of most other midstream funds:
Fund | Current Yield |
Neuberger Berman Energy Infrastructure and Income Fund | 10.20% |
Kayne Anderson Energy Infrastructure Fund ( KYN ) | 9.96% |
First Trust Energy Income and Growth Fund ( FEN ) | 8.13% |
Tortoise Midstream Energy Fund ( NTG ) | 9.11% |
ClearBridge MLP and Midstream Fund ( CEM ) | 8.00% |
In addition to the fund’s high yield, the Neuberger Berman Energy Infrastructure and Income Fund has a reputation for being one of the best midstream funds on the market. This is partly because the fund has managed to perform better than many of its peers since the start of 2020:
The reason why this time frame was chosen is that it puts the start date of the comparison prior to the pandemic-driven collapse in energy prices and pretty much every company related to the energy industry, including midstream companies. This therefore gives us a good idea of how well the fund managed to perform through the crash and the resultant recovery. As we can clearly see, the Neuberger Berman Energy Infrastructure and Income Fund managed to navigate the challenging environment and the industry recovery much better than its peers. That is something that might appeal to risk-averse investors who are worried about the fact that this industry has crashed twice over the past decade.
As regular readers can likely recall, we last discussed this fund in late September of this year. The fund’s performance since that time has not been anything particularly impressive, especially considering the incredibly strong rally that the broader stock market experienced over the period. As we can see here, an investor who purchased shares of this fund on the date that my prior article was published has only managed to increase the value of their investment by a scant 0.92%. The S&P 500 Index ( SP500 ) is up 6.85% and the Alerian MLP Index ( AMLP ) is up 5.59% over the same period:
This certainly reduces the love for this fund that some investors have developed since the COVID-19 pandemic. In fact, the First Trust Energy Income and Growth Fund has delivered a 12.25% total return over the same period, so the Neuberger Berman Energy Infrastructure and Income Fund looks like it is standing still compared to this direct peer. However, the First Trust fund is benefiting from the recent announcement that it, along with First Trust’s other energy infrastructure funds, will be merged into an exchange-traded fund. That has surely reduced some of the discounts that these funds historically trade at.
Let us revisit the Neuberger Berman Energy Infrastructure and Income Fund and see if it could make sense for a portfolio today. After all, a great deal of time has passed, and that has undoubtedly affected our investment thesis.
About The Fund
According to the fund’s website , the Neuberger Berman Energy Infrastructure and Income Fund has the primary objective of providing its investors with a high level of total return. The website also describes the fund’s overall strategy in order to achieve this objective. Here is what the website states:
NML is a non-diversified, closed-end management company that invests primarily in midstream infrastructure investments and other energy companies, including renewables.
The Fund’s investment strategy focuses on companies that companies that provide essential services to move, store, and process energy. The Fund seeks to provide investors with attractive total return and cash distributions. NML’s energy infrastructure investments are expected to emphasize companies that the Portfolio Managers believe have growth potential, scale, geographic and business-line diversity, high-quality counterparty exposure, strong balance sheets and coverage ratios, and sustainable cash flow. The Fund’s investment process is driven by first-hand research supported by a team of industry research analysts, as well as one-on-one meetings with company management and industry experts.
The first thing that we notice in this description is that the website does not specifically state whether the fund will be investing solely in common equity issued by energy infrastructure companies, or if its investments will also include preferred stocks and bonds. The majority of energy infrastructure funds only invest in common equity, however. This one appears to be no exception to that rule, as the fund’s portfolio currently has a 121.18% weighting to common equity alongside a small amount of cash:
In many industries, a closed-end fund can enhance its income by including preferred stock or debt in the portfolio. Real estate income closed-end funds like the CBRE Global Real Estate Income Fund ( IGR ) do this, for example. This is because preferred equity usually has a higher yield than common equity of the same company. However, that is not necessarily the case with midstream partnerships. For example, NuStar Energy ( NS ) common units currently yield 8.37% but its class B preferred equity ( NS .PR.B) yields 11.02% annualized based on its most recent distribution payment. However, earlier in the year, the common equity was yielding close to 11% just like the preferred units. As is the case with every company, common equity has more upside potential so there is no reason to include preferred units into a portfolio if they do not provide a meaningful yield premium over the common equity.
As long-time readers are certainly well aware, I have devoted a considerable amount of time and effort to discussing midstream companies and other energy infrastructure firms over the years both here at Energy Profits in Dividends and on the main Seeking Alpha page. As such, the majority of the fund’s holdings will likely be familiar to many people who are reading this. Here are the largest positions in the fund:
I have discussed all of the companies on this list multiple times over the years, with the notable exception of Western Midstream Partners LP ( WES ). Western Midstream Partners is a classic midstream master limited partnership that operates in the Permian and DJ Basins, with a focus on natural gas and natural gas liquids. From the company’s webpage :
Our core assets provide services for customers in the Delaware Basin in West Texas and New Mexico, and the DJ Basin in northeastern Colorado. Additional assets and investments are located in South Texas, Utah, Wyoming, and north-central Pennsylvania.
We’re engaged in the business of gathering, compressing, treating, processing, and transporting natural gas; gathering, stabilizing and transporting condensate, natural gas liquids and crude oil; and disposing of produced water for our customers. As a natural gas processor, we also buy and sell natural gas, NGLs, and condensate on our behalf and as an agent for our customers under certain contracts.
This is a very similar business model to the one that is used by other midstream companies, so most readers likely understand how this company basically operates. In short, it enters into long-term contracts with its customers under which it transports, stores, and processes hydrocarbons. The company’s contracts are volume-based just like any other midstream company. As such, it will have fairly limited exposure to fluctuations in crude oil or natural gas prices. This is exactly what we want with an income investment, as its general stability provides a great deal of support for its 7.86% current distribution yield.
The remainder of the midstream companies on this list are going to be quite similar to Western Midstream Partners, and we have discussed all of them in numerous previous articles so even the ones that are not midstream companies should be reasonably familiar. Those of you who may not be familiar with my past work are welcome to look through my history for in-depth discussion of any other company whose common equity is held among the fund’s largest positions.
There have been a few changes to the largest positions in the fund over the past two months since we last discussed it. The most important of these are that Civitas Resources ( CIVI ) and Sempra ( SRE ) were removed from the list. In their place, we have ConocoPhillips ( COP ) and CenterPoint Energy ( CNP ). This is an interesting change, especially the addition of ConocoPhillips. As we have discussed a few times here, the market has been placing a great deal of emphasis on a company’s environmental, social, and governance scores and credentials when determining whether or not to include its securities in a fund. This is arguably one of the reasons why the fossil fuel industry is seemingly perpetually undervalued when compared to companies in just about every other sector.
Civitas Resources, while it is a natural gas-focused exploration and production company, puts a considerable amount of effort into promoting its environmental credentials. In comparison, ConocoPhillips does not emphasize its own scores to nearly the same extent. This could be a good sign though, as it indicates that the fund’s managers could be more interested in maximizing returns than in promoting a certain political philosophy. According to Zacks Investment Research , ConocoPhillips is currently significantly undervalued relative to its forward earnings per share growth as the company currently trades with a price-to-earnings ratio of 0.68 at the current share price. Civitas Resources is expected to see its earnings per share decline over the next twelve months, which is obviously worse. With that said, ConocoPhillips does have a much higher forward price-to-earnings ratio than Civitas Resources.
The fact that there have been relatively few changes to the fund’s portfolio could suggest that the Neuberger Berman Energy Infrastructure and Income Fund has a fairly low turnover rate. This is certainly the case, as this fund has a 19.00% annual turnover. That is one of the lowest turnovers of any peer funds. Here is how this fund compares to the peers that were mentioned in the introduction:
Fund | Annual Turnover |
Neuberger Berman Energy Infrastructure and Income Fund | 19.00% |
Kayne Anderson Energy Infrastructure Fund | 28.20% |
First Trust Energy Income and Growth Fund | 54.00% |
Tortoise Midstream Energy Fund | 72.67% |
ClearBridge MLP and Midstream Fund | 53.00% |
This confirms that the Neuberger Berman Energy Infrastructure and Income Fund engages in somewhat less asset trading than many of its comparable peers. This is something that is fairly nice to see because a low turnover helps to keep the fund’s expenses down. As I stated in my previous article:
The reason that the low annual turnover is nice to see is that it costs the fund money to trade stocks or other assets. These expenses are billed directly to the shareholders and create a drag on the fund’s performance. They also make the management’s job much more difficult because the fund’s managers need to generate sufficient returns to cover these costs and have enough left over to deliver a satisfactory return to the shareholders. There are very few management teams that manage to accomplish this on a consistent basis, which is one of the biggest reasons why actively managed funds usually underperform their benchmark indices.
Unfortunately, while the Neuberger Berman Energy Infrastructure and Income Fund does have a fairly good track record against its closed-end fund peers, it struggles against an ordinary index fund. Over the past five years, the Neuberger Berman Energy Infrastructure and Income Fund has delivered a 32.90% total return compared to 43.87% of the Alerian MLP Index:
The difference is even more stark when we look at a longer time period. Over the past ten years, investors in the Neuberger Berman Energy Infrastructure and Income Fund lost money but the Alerian MLP Index managed to deliver a positive total return:
This is a period of time that includes two industry collapses, which obviously caused much more capital destruction for a leveraged closed-end fund than it did for an unleveraged index fund that did not take outsized losses during the 2015 and 2020 energy price collapses. This unfortunately makes the case for simply buying the index fund over any energy infrastructure closed-end fund. I can sympathize with that view and indeed it might be the best option for highly risk-averse investors. However, the Neuberger Berman Energy Infrastructure and Income Fund does have a higher yield than the Alerian MLP Index and includes utilities, renewable energy providers, and midstream corporations. The index fund does not include any of these entities, so the closed-end fund provides a certain advantage when it comes to diversification.
Leverage
As just mentioned, the Neuberger Berman Energy Infrastructure and Income Fund employs leverage as a method of boosting its effective total returns. This is the reason why the fund is able to have an equity position in excess of 100% of its assets. I explained how this works in my previous article on this fund:
In short, the fund borrows money and then uses that borrowed money to purchase common units of midstream partnerships or corporations. As long as the purchased assets have a higher yield than the interest rate that the fund has to pay on the borrowed money, the strategy works pretty well to boost the effective yield of the portfolio. This fund is capable of borrowing money at institutional rates, which are considerably lower than retail rates. As such, this will usually be the case. With that said though, the beneficial effects of leverage are not as great today with interest rates at 6% as they were two years ago when interest rates were at 0%. Fortunately, most midstream partnerships have yields above 6% so the strategy still works to boost the effective portfolio yield.
Unfortunately, the use of debt in this fashion is a double-edged sword because leverage boosts both gains and losses. As such, we want to ensure that the fund is not using too much leverage because that would expose us to an excessive amount of risk. I do not usually like a fund’s leverage to exceed a third as a percentage of its assets for this reason.
As of the time of writing, the Neuberger Berman Energy Infrastructure and Income Fund has leveraged assets comprising 17.94% of its assets. This is a relatively small increase from the 17.72% leverage that the fund had the last time that we discussed it, which could be caused by the fund’s net asset value declining a bit since the last article’s publication date:
As we can see, the fund’s net asset value has declined by 1.50% since the last time that we discussed it. This would cause the fund’s leverage to increase since leverage remains the same while assets decline. The overall decline in the net asset value is not something that we would like to see, although the fund’s leverage still remains quite reasonable. Overall, we probably do not need to worry too much about the fund’s leverage right now as the balance between the risk and the reward continues to look quite acceptable.
Distribution Analysis
As mentioned earlier in this article, the Neuberger Berman Energy Infrastructure and Income Fund has the primary objective of providing its investors with a very high level of total return. In order to accomplish this objective, it invests in midstream companies, renewable energy and traditional energy partnerships, and similar companies. One of the defining characteristics of all of these companies is that they deliver an overwhelming proportion of their total investment return in the form of direct payments to their owners. That would include this fund, so we can assume that the fund will have a significant amount of money flowing into it in the form of distributions and dividends. The fund pools all of the money that it receives and adds it to any capital gains that it manages to realize. The fund then pays out all of this money to its investors, net of its own expenses. We might expect that this would allow the fund to have a very high distribution yield.
This is indeed the case, as the Neuberger Berman Energy Infrastructure and Income Fund pays a monthly distribution of $0.0584 per share ($0.7008 per share annually), which gives it a 10.20% yield at the current price. Unfortunately, the fund has not been especially consistent with its distribution over the years:
This is certainly a much better distribution history than some other midstream funds possess. After all, this is probably the only fund that has completely restored the distribution that it had prior to the pandemic-driven industry collapse. In fact, the fund’s current distribution is $0.0584 per share monthly but prior to the pandemic, it was paying $0.0550 per share monthly. It seems that this will be somewhat more appealing than the distribution history of most of the fund’s peers for those investors who are seeking to own a safe and secure source of income that can help pay bills or finance a lifestyle. It still is not perfect though, since the 2015 oil bear market did force the fund to cut its distribution, apparently permanently.
As I have pointed out numerous times in the past, the fund’s history is not necessarily the most important thing for investors today. After all, anyone who purchases the fund’s shares today will receive the current distribution at the current yield and will be completely unaffected by actions that the fund had to take in the past. The most important thing for us today is ensuring that the fund can sustain the distribution that it is currently paying out.
Unfortunately, we do not have an especially recent report that we can consult for this purpose. As of the time of writing, the fund’s most recent financial report corresponds to the six-month period that ended on May 31, 2023. As such, this report will not cover anything that happened over the past six months. This is disappointing, as there were quite a few events over the past six months that would have undoubtedly had an impact on this fund. In particular, energy stocks generally did pretty well during the period of rising long-term rates that occurred from mid-July until mid-October. That could have given the fund the potential to earn some capital gains that will not be reflected in this report. Nevertheless, we are basically forced to work with what we have available to us.
During the six-month period, the Neuberger Berman Energy Infrastructure and Income Fund received $15,291,886 in dividends and distributions along with $51,510 in interest from the assets in its portfolio. As is the case with most midstream funds, a significant percentage of the dividend and distribution income that this fund receives is considered to be a return of capital and is thus not included in the fund’s net investment income. As such, the fund only reported a total investment income of $5,255,662 during the period. That was not sufficient to cover the fund’s expenses, and it reported a net investment loss of $557,460 during the period. At first glance, this is almost certainly going to be concerning as the fund’s net investment income was not sufficient to cover any distribution, but it still paid out $19,853,288 to its investors.
However, the fund does have other methods through which it can obtain the money that it needs to pay its distributions. For example, the fund received $10,069,552 from master limited partnerships that was classified as a return of capital but still obviously represents money coming into the fund. In addition, the fund might have been able to generate some capital gains from equity appreciation. Unfortunately, the fund had somewhat mixed results in this task during the period. It reported net realized gains of $20,214,120 but this was offset by net unrealized losses of $76,132,090 over the course of six months. Overall, the fund’s net asset value declined by $76,328,718 after accounting for all gains and losses during the period. Thus, the fund technically failed to cover its distribution during the six-month period.
However, the fund’s net realized gains were almost enough to cover both the net investment losses and the distribution. The real problem here was the unrealized capital losses, and as we all know these losses are not permanent unless the fund actually sells out of its position and realizes these losses. As long as it simply holds the securities, it may be able to erase the unrealized losses during a market rally. Fortunately, it appears that the fund has been successful at this task ever since the most recent report was released. As we can see here, the fund’s net asset value per share is actually up 5.07% since the date that this report was released:
The fund’s net asset value per share is also up 0.25% year-to-date:
This suggests that the fund is currently managing to cover its distribution, despite the somewhat disappointing numbers that we see in its most recent financial report. As such, we probably do not need to worry too much about its distribution sustainability today.
Valuation
As of December 5, 2023 (the most recent date for which data is currently available), the Neuberger Berman Energy Infrastructure and Income Fund has a net asset value of $7.87 per share but the shares only trade for $6.91 each. This gives the fund’s shares a 12.20% discount on net asset value at the current price. That is a very attractive discount, although it is not quite as good as the 13.73% discount that the shares have had on average over the past month. As such, it might be possible to get a better price by waiting for a little while, but the current entry price is fine if you wish to add this fund to your portfolio. After all, a double-digit discount is generally a reasonable price to pay for any closed-end fund.
Conclusion
In conclusion, the Neuberger Berman Energy Infrastructure and Income Fund is one of the more popular midstream closed-end funds for a few very good reasons. In particular, this fund has a very strong performance history relative to some of its peers, pays a very high yield, and is apparently covering the distribution. Overall, this one might be worth considering as a way to add exposure to this sector into a tax-advantaged account.
For further details see:
NML: This Excellent Midstream CEF Might Be Worth Considering Today