BROOKFIELD PUBLIC SECURITIES GROUP i | ENERGY INFR ASTRUC TURE
1FOR INSTITUTIONAL INVESTOR USE ONLY. NOT FOR USE WITH OR DISTRIBUTION TO THE PUBLIC.
Understanding the North American Energy Infrastructure Industry
North American energy infrastructure is a diverse industry that covers a multitude of functions across the major hydrocarbon streams (oil, natural gas and natural gas liquids, or “NGLs”). The potential investment opportunity set is vast—currently a $600-$700 billion universeii—given that the industry is primarily responsible for transporting natural resources across the world.
Because each company typically engages in different parts of the value chain, understanding the assets, cash flow quality and financial positioning of each entity is critical to making investment decisions. At Brookfield, we lean on our team’s past experiences as energy infrastructure owner-operators throughout the investment process, and we believe this creates a distinct advantage when making portfolio decisions. At its core, our energy infrastructure team’s investment philosophy has always focused on trying to achieve the best risk-adjusted returns for its shareholders by investing in high-quality energy infrastructure companies that own critical assets run by proven management teams.
In this paper, we discuss the energy infrastructure universe, the current investment opportunity set, and the important roles we think the asset class can serve in a diversified investment portfolio. We also walk through our investment philosophy and the importance of having an actively managed, flexible strategy that is fully able to take advantage of this diverse asset class.
W H AT I S E N E R G Y I N F R A S T R U C T U R E ? Broadly speaking, energy infrastructure is the part of the energy value chain (Exhibit 1) that connects energy producers with energy consumers. Energy infrastructure consists of many activities that are focused on transporting hydrocarbons and some derivative products (i.e., refined products or petrochemicals) from supply sources (the wellhead) to end demand centers or export locations on various North American coasts.
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UNDERSTANDING THE NORTH AMERICAN ENERGY INFRASTRUCTURE INDUSTRY
W H AT D O E S T H E I N V E S TA B L E U N I V E R S E L O O K L I K E ? Companies that own and operate energy infrastructure assets represent approximately a $600-$700 billion opportunity set. ■ Within the industry, there are typically two types of corporate structures: a traditional C corporation (“C-corp”) and
a Master Limited Partnership (“MLP”).■ An MLP is a unique structure found in the U.S. that combines the tax benefits of a limited partnership with the liquidity
of a publicly traded stock.
■ U.S. federal income laws state that in order to qualify to choose to structure as an MLP, a company must derive at least 90% of its revenues from “qualifying income,” which includes income derived from the exploration, production or transportation of natural resources.
■ As a result, many infrastructure companies have chosen to be structured as an MLP.
M&A activity has reduced the number of MLPs outstanding over the past few years, and although the market cap of the sector is weighted more toward C-corps, there are more midstream partnership investment opportunities than C-corps. When it comes to our investments, we are structure-agnostic—striving to invest in the best assets and management teams, regardless of corporate structure.
E X H I B I T 1 : T Y P E S O F M I D S T R E A M A S S E T S W I T H I N T H E E N E R G Y VA L U E C H A I N ENERGY VALUE CHAIN
UPSTREAM ENERGY EXPLORATION
PRODUCERS
MIDSTREAM ENERGY INFRASTRUCTURE
DOWNSTREAM ENERGY USERS
Rich Gas Gathering Pipelines
Residue Gas Transportation
Pipelines
NGL Fractionation
& Storage
Crude Storage
Downstream Transportation
Pipelines
Liquefaction
Crude Oil Exports Terminal
NGL Exports Terminal
Purity NGL Pipelines
Industrial
Consumer Use
Refineries
Refineries
Consumer Use
Natural Gas Storage
Rich Gas Processing
Mixed NGL Pipelines
NATUR AL GAS
NATUR AL GAS LIQUIDS (NGLs)
CRUDE OIL & CONDENSATE
REFINED PRODUC TS
Ethane
Butane
Propane
Iso-Butane
Natural Gasoline
Gathering Pipelines
Truck and Rail
Transportation Pipelines Petchem
Petchem
Storage Pipelines Terminal Trucks & Rail Consumer Use
GATHERING & PROCESSING: Gathering systems, comprised of many small-diameter pipes, are connected to the wellsite and they transfer crude oil, dry gas, or “wet gas” (dry gas that includes NGLs) to a pool point, processing facility or long-haul pipeline. Wet gas is processed in order to separate NGLs and remove other impurities from the gas stream.
FRACTIONATION: Once processed out of the gas stream, NGLs are sent to fractionation facilities that separate the NGL mix into its primary components (ethane, propane, butane, isobutane and natural gasoline).
LONG-HAUL PIPELINES: After the resource has been gathered, processed or fractionated (if done in the supply basin), long-haul pipelines carry the hydrocarbons to different demand centers (local natural gas distribution centers, export facilities, refineries, and other energy users).
EXPORT TERMINALS: These facilities prepare and move crude oil, NGLs and natural gas that has been (liquefied natural gas, or LNG) to ships for transport to different demand centers around the world.
TERMINALS & STORAGE: These facilities hold the different resources until they can be transported to various demand centers.
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Source: BP Energy Outlook: 2019 edition; Brookfield Public Securities Group. Data constitute projections of possible future results based on currently available public information. The projections are hypothetical in nature, do not reflect actual trading or corporate operating results, and are not guarantees of future results. Actual performance results may differ from the projections. See Appendix for additional disclosures.
1) Natural Gas Liquids (“NGLs"). 2) Liquified Petroleum Gas (“LPG”). 3) Liquified Natural Gas (“LNG”). Source: Brookfield Public Securities Group LLC.
T H E C U R R E N T I N V E S T M E N T O P P O R T U N I T Y We believe the current landscape offers a unique and compelling investment opportunity. Midstream fundamentals are solid, sustained by record U.S. production growth and growing global demand, particularly for cheap North American natural gas and NGLs. Moreover, recent capital spending on major pipeline and infrastructure projects by midstream operators has further relieved congestion in major production areas, enabling these critical supplies to access global markets.
To accommodate these record volumes, some industry estimates call for over $800 billion of new energy infrastructure to be built by 2035, with a significant portion of the projected activity centered around the U.S. Gulf Coast.
E X H I B I T 2 : U . S . S U P P LY I S C R I T I C A L T O M E E T I N G G L O B A L D E M A N D N E E D S
E X H I B I T 3 : N O R T H A M E R I C A N S U P P LY & D E M A N D F U N DA M E N TA L S S U P P O R T M I D S T R E A M G R O W T H
20402030202020172020E2019E201820172020E2019E20182017
15.515.213.912.5
18.617.315.3
13.1
U.S. Supply (MMBoepd)Liquids
U.S. Supply (MMBoepd)Natural Gas
+42% Growth
+24% Growth
Global Liquids Consumption(MMBPD)
+10% Growth
2040203020202016
518.2454.8
380.5356.1
Global Natural Gas Consumption(Bcf/d)
+46% Growth
107.7106.4101.698.2
THE PERMIAN BASIN ■ Takeaway solutions for
all three hydrocarbon streams down to the Gulf Coast
■ Additional processing capacity for natural gas and NGLs1
THE GULF COAST■ Fractionation capacity for NGLs
■ Takeaway solutions to export and petrochemical facilities
THE MID-CONTINENT ■ Takeaway solutions for
crude oil and NGLs to the Gulf Coast; natural gas to multiple demand markets
THE NORTHEAST ■ Takeaway solutions for NGLs
(primarily ethane) for transport to petrochemical facilities or East Coast export facilities
■ Additional processing capacity for NGLs
NATURAL GAS■ Growth from natural gas-fired
power generation
■ Pipeline exports to Mexico
LNG3 EXPORTS■ Represents one of the largest
growth markets
■ Additional export capacity
CRUDE/LPG2 EXPORTS■ Deepwater offshore capacity
(crude)
■ Other dock expansions
THE PETROCHEMICAL ("PETCHEM") INDUSTRY ■ Ethane crackers
■ Ethylene export infrastructure
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UNDERSTANDING THE NORTH AMERICAN ENERGY INFRASTRUCTURE INDUSTRY
RELATIVE CASH FLOW STABILIT Y A DIFFERENTIATOR FOR ENERGY INFR ASTRUCTURE
One of the key points we like to highlight is the historical cash flow stability for midstream assets throughout commodity cycles. The underlying cash flow stream continues to grow, supported by the fee-based nature of the asset-level cash flows. This makes energy infrastructure materially different than investing in other parts of the energy value chain (Exhibit 5), and we believe it should make the sector less volatile over the long term. We expect the cash flow stability to support current payout levels and we view the currently high income generation potential as an integral component of the total return potential for the asset class.
As of April 4, 2019. Graph takes top 5 current constituents by weight or market capitalization for representative indices and calculates average indexed cash flow per share growth using Bloomberg. Constituents are: (Midstream/AMNA Index) EPD, TRP, ENB, KMI, ET; (Services/OSX Index) SLB, HAL, NOV, HP, RIG; (Broader Energy/IXE Index) XOM, CVX, COP, SLB, EOG; (Refining/S15OILR Index) PSX, MPC, VLO, HFC, PBF; (E&Ps/Top 5 Independent producers in SPSIOP Index); COP, EOG, OXY, PXD, APC. For illustrative purposes only; past performance is not indicative of future results. Sources: Bloomberg, Brookfield Public Securities Group LLC.
E X H I B I T 5 : R E L AT I V E C A S H F LO W S TA B I L I T Y S E T S M I D S T R E A M A PA R T
0
100
200
300
E&PsRefiningBroader EnergyServicesMidstream
Indexed Cash Flow per Share Comparison (2007-18)
O U R I N V E S T M E N T P H I L O S O P H Y We seek to identify the highest-quality energy infrastructure companies that possess what we believe to be critical and irreplaceable assets with stable and growing cash flows, backed by proven management teams. Members of our investment team have owned and operated midstream assets, and we utilize this expertise throughout the investment process.
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E X A M P L E S O F O U R I N V E S T M E N T C R I T E R I A ASSET & CASH FLOW QUALITY
Integrated Footprints■ Vertical integration across the diversified midstream
value chain
Strategic Positioning and Geographic Exposure■ Assets that are critical and irreplaceable, such as a large,
well-positioned natural gas transmission system
■ Operations in multiple supply basins or demand centers across North America
■ Locations that support cash flow growth from growing upstream production or downstream assets
Contract Profile and Counterparty Strength■ Assets backed by fixed-fee, take-or-pay contracts,
with little direct commodity price exposure and long-term contracts (10+ years)
■ Investment-grade counterparties that also have strategic assets, proven management teams, and strong balance sheets
MANAGEMENT QUALITY & FINANCIAL POSITIONING
Management Experience■ Management teams with significant operational
expertise and a proven track record of execution, with capital projects completed on time and on budget
Prudent Stewards of Capital■ Teams that have a history of allocating capital to
projects that have enhanced shareholder value, with a focus on growing cash flow and long-term shareholder total returns
Balance Sheet Strength■ Investment-grade companies with enough flexibility
to be nimble when M&A opportunities arise
Corporate Finance Strategy ■ A preference for funding capital budgets with excess
operating cash flow (high distribution coverage) and sustainable debt, thereby reducing reliance on external equity capital markets
C L O S I N G T H O U G H T S – T H E I M P O R TA N C E O F A C T I V E M A N A G E M E N T We believe the energy infrastructure industry offers a compelling investment opportunity for investors and that the most efficient way to access the asset class is via an actively managed strategy without constraints or limits to corporate structure. Because the industry makeup has changed in recent years, an “MLP-only” passive strategy has affected investors’ abilities to invest in certain assets. For example, investors might miss out on investing in companies that own some of the most important natural gas pipelines in North America by investing in passive products. We believe our approach—investing in the best companies with the best assets and management teams, regardless of corporate structure—is what matters most in choosing how to structure an energy infrastructure portfolio. And we believe that our owner-operator expertise provides a powerful competitive advantage in making strategic portfolio decisions as the industry continues to change.
We believe this gives us a competitive advantage and deeper understanding of the assets, companies, management teams and broader industry dynamics.
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I M P O R T A N T D I S C L O S U R E S Brookfield Public Securities Group LLC (“PSG” or “the Firm”), is an SEC-registered investment adviser and represents the Public Securities Group of Brookfield Asset Management Inc., providing global listed real assets strategies including real estate equities, infrastructure equities, multi-strategy real asset solutions and real asset debt. PSG manages separate accounts, registered funds and opportunistic strategies for institutional and individual clients, including financial institutions, public and private pension plans, insurance companies, endowments and foundations, sovereign wealth funds and high net worth investors. PSG is an indirect, wholly-owned subsidiary of Brookfield Asset Management, Inc., a leading global alternative asset manager. The information in this presentation is not intended as investment advice, an indication of trading intent or holdings or the prediction of investment performance. Views and information expressed herein are subject to change at any time. Brookfield Public Securities Group LLC disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Brookfield Public Securities Group LLC does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service; nor shall any security, product, investment advice or service be offered or sold in any jurisdiction in which Brookfield Public Securities Group LLC is not licensed to conduct business and/or an offer, solicitation, purchase or sale would be unavailable or unlawful.Opinions expressed herein are current opinions of Brookfield Public Securities Group LLC, including its subsidiaries and affiliates, and are subject to change without notice. Brookfield Public Securities Group LLC, including its subsidiaries and affiliates, assume no responsibility to update such information or to notify client of any changes. Any outlooks, forecasts or portfolio weightings presented herein are as of the date appearing on this material only and are also subject to change without notice. Past performance is not indicative of future performance and the value of investments and the income derived from those investments can fluctuate. Future returns are not guaranteed and a loss of principal may occur.
D E F I N I T I O N S The Alerian MLP Index is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs). The capped, float-adjusted, capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities, is disseminated real-time on a price-return basis (AMZ) and on a total-return basis (AMZX).The Alerian Midstream Energy Index (AMNA) is a broad-based composite of North American energy infrastructure companies. The capped, float-adjusted, capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities, is disseminated real-time on a price-return basis (AMNA) and on a total-return basis (AMNAX).The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds. The Bloomberg Barclays U.S. Corporate High Yield Total Return Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays’ EM country definition, are excluded. The Energy Select Sector (“IXE”) Index is one of the eleven Select Sector Indices that seeks to track their respective Global Industry Classification Standard (GICS®) sectors. The IXE tracks companies within the Energy GICS® sector, which is comprised of companies that are engaged in exploration & production, refining & marketing and storage & transportation of oil & gas and coal & consumable fuels. The sector also includes companies that offer oil & gas equipment and services. The S&P Oil & Gas Exploration & Production Select Industry (“SPSIOP”) Index is a sub-index of the Energy Select Sector Index. The index
comprises stocks in the S&P Total Market Index that are classified in the GICS oil & gas exploration & production sub-industry.The S&P Oil & Gas Refining & Marketing Select Industry (“S15OILR”) Index is a sub-index of the Energy Select Sector Index. The index comprises stocks in the S&P Total Market Index that are classified in the GICS oil & gas refining & marketing sub-industry.The PHLX Oil Service Sector (“OSX”) Index is designed to track the performance of a set of companies involved in the oil services sector.The PHLX Utility Sector Index is a market capitalization weighted index composed of geographically diverse public U.S. utility stocks.
F O R W A R D - L O O K I N G S T A T E M E N T S Information herein contains, includes or is based upon forward-looking statements within the meaning of the federal securities laws, specifically Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include all statements, other than statements of historical fact, that address future activities, events or developments, including, without limitation, business or investment strategy or measures to implement strategy, competitive strengths, goals, expansion and growth of our business, plans, prospects and references to future our success. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other similar words are intended to identify these forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining our actual future results or outcomes. Consequently, no forward-looking statement can be guaranteed. Our actual results or outcomes may vary materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
E N D N O T E Si. Brookfield Public Securities Group LLC (“PSG” or “the Firm”) is an indirect,
wholly owned subsidiary of Brookfield Asset Management
ii. Source: Bloomberg, Brookfield Public Securities Group
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