This newsletter will keep you up to date on recent events and news affecting U.S. energy markets and Master Limited Partnerships (MLPs). MLPs own hard assets such as pipelines, refineries and storage facilities that are crucial to the continued development of the domestic energy industry.

For over 20 years, DeWitt Capital Management has provided investors with separately managed MLP portfolios designed to deliver a high current yield and maximum total returns. For more information, please check out our website at dewittcm.com or call 610-975-4435.

DeWitt Capital Management Q2 MLP Commentary

Master Limited Partnerships- The Build-out Continues
Investors are continuing to invest in the midstream energy sector at a record pace as shale resources across the country are proving even more prolific than initial estimates. MLPs continue to be well positioned from the rapidly changing growth of energy in the United States. Some major themes that continue to drive the outperformance of the MLP sector are recent M&A activity, significant talk surrounding new export markets, institutional interest continuing to expand and some major new pipeline projects being

*Please refer to performance disclosure below
announced during the quarter. MLP valuations are currently trading at a premium to historical levels but we still see significant opportunity with multi-year growth stories and well positioned assets that will maintain growth and continue to outperform. At DeWitt Capital Management we continue to focus on distribution growth, for the year our portfolio saw distribution growth of 12.5% and we project between 12-14% distribution growth in the next 12 months.

What is working in 2014?
One of our major MLP theses over the past couple years has been that we would see a revaluation of the MLP sector as investors further understood the high quality nature of MLP cash flows. Our belief was that MLPs should deservingly trade at equivalent yields to utilities (3.7%) and REITs (3.8%), which meant there was significant upside to the sector as MLP prices would have to rise to match those yields. While the revaluation of the broad MLP sector is not complete (sector yield is 5.3%), several MLPs within our portfolio have seen significant distribution growth which in turn led to lower yields as the prices rose. While MLPs as a whole have performed well in 2014, we continue to see a disparity between the “haves” and “have-nots” as MLPs in core shale plays with significant organic growth and multi-year distribution growth visibility continue to outperform. Dropdown MLPs, where a corporate sponsor forms an MLP to monetize their infrastructure assets, have also performed strongly with their multi-year dropdown backlog. Investors must have visibility into future growth when evaluating MLPs. The Marcellus and Utica Shales continue to grow and as a result the directional energy flows in the United States are rapidly changing, gas no longer has to be sent to the northeast from the gulf coast. It’s more important than ever to make sure to avoid MLPs with legacy assets that may see declining volumes due to changing energy flows. General Partners, which manage the daily operations of an MLP, continue to remain an attractive investment as they collect incremental cash flow from the MLP as it grows which generates a multiplier effect on distribution growth.

New Developments in MLP World
Politicians are keeping the topic of energy exports front and center as they are beginning to realize the geopolitical advantage we have in our vast energy resources. Enterprise Products Partners, one of the largest MLPs, has led the charge in the export of liquefied petroleum gas (LPGs made up of Propane and Butane). The USA is now on track to be the world’s largest exporter of LPGs by 2020. The US government put liquefied natural gas (LNG) export on the political fast track as a way to combat Vladimir Putin’s march into Europe. Because of a wide global price disparity in natural gas ($15/Mcf in Japan, $10/Mcf in Europe, $4/Mcf in US) on top of our nearly unlimited supply, domestic energy producers are positioned for an arbitrage opportunity with exports. Once again MLPs sit right in the middle of the opportunity. An enormous amount of midstream infrastructure must be built to support energy exports with MLPs playing a part from the pipelines, processing facilities, to the ships transporting the hydrocarbons. Export investment is not the only area seeing significant growth; there was a slate of major long-haul pipeline projects announced this quarter. Energy Transfer (ETP) and Enterprise Products (EPD) both announced multi-billion dollar pipeline solutions for the over 1 million barrels of crude oil being produced a day in North Dakota. As production continues to climb, organic capital expenditures by MLPs are on pace for a record $33.7B this year according to Wells Fargo. Over the past 5 years, the average organic capital expenditures have been $18B. Industry analysts expect this higher level of investment to remain elevated for decades to come and drive MLP growth moving forward. Certainly, you can agree with us that it is a new energy age in America.

Looking Forward
MLPs are currently trading at a premium to historical levels. The easiest metric to look at to determine the premium is yield. The Alerian MLP Index has a 10-year average yield of 7.3% versus the current 5.3% yield on the index. Our view is that this premium is justifiable and a new normal for the sector as the industry is continuing to mature. Not only is the sector continuing to mature, but the pace of distribution growth has increased which is supportive of the premium. Overall fundamentals remain supportive of further growth with the build-out of U.S energy infrastructure providing visibility into billions of dollars of midstream investment in the coming years. The rising production of crude oil, natural gas and natural gas liquids is providing numerous growth projects as much of the production is coming from areas of the country without sufficient infrastructure. We have maintained an overweight position to MLPs exposed to liquids rich drilling areas. As the date for LNG exports nears, many natural gas pipelines will benefit from increasing volumes to meet the export demand. Shipping MLPs also stand to benefit as the global demand for LNG and LPGs continues to grow. As the MLP sector continues to rapidly expand, DeWitt Capital is maintaining a focus on the MLPs with visible distribution growth, good distribution coverage and strong balance sheets.

It is an excited time in the world of MLPs; we want you to be just as excited. If you or anyone you know would be interested in learning more about MLPs and their benefits, please let us know and we’d be happy to further educate them on the sector.

Sincerely,

Bob Milnes
Vice President, Portfolio Manager
DeWitt Capital Management