Making money with LPs (Part 2): American energy demand is growing

Back when I (Energy Pipeline News editor Noel Griese) was working on a graduate degree at the University of Wisconsin in the 1970s, I ran data on more than 140 independent nations of the world looking for the correlates of economic development. What factors, I wanted to know, using three-wave lagged correlations as the tool to determine causality, explained growth in gross national product?
The upshot of the research was that one inanimate factor and one animate factor (independent or causal variables) explained almost all growth in national GNP (dependent variable).
The inanimate correlate of growth in GNP is energy consumption per capita. The greater the energy consumption per capita, the greater the growth in GNP. The animate factor is education per capita. The higher the education of the population, the greater the growth in GNP. Energy consumption per capita is a far more powerful predictor than education. Put the two primary correlates together, and you explain almost all of the growth in GNP for a given country.
The United States and the other nations of the world are currently wallowing in one of the most severe economic recessions since World War II. To emerge from that recession, we will almost certainly have to invest large amounts of capital in energy and education.
Despite conservation efforts, the existing energy infrastructure of the United States just can't keep up with our ever-increasing thirst for energy. By 2030, Americans will require an estimated 131.2 quadrillion BTUs of energy - up 33 percent from 2005.
While it’s difficult to invest in education, with few available opportunities, investing in energy is easy. A multitude of investment opportunities exist.
One opportunity promising better than average returns is to invest in pipeline limited partnerships, or in the mutual funds that invest in the LPs. In a future article, I'll explore why investing in the mutual funds is less complicated from a tax standpoint than investing directly in the LPs.
The advantage of investing in LPs is that they offer consistently higher, more secure yields than most other investments.
In the past, the average yield of LPs has ranged anywhere from 7-10 percent, and currently it hovers well above eight percent.
One of the LPs in which the editor is currently investing, while it has above-average risk, is currently yielding 53 percent in dividends – and that does not include the capital gains likely to be realized as pension funds start reinvesting in LPs offering high yields, driving up the unit price.
That's not to say LPs are immune to market implosions like the one that began last year - they aren't. Mutual funds that were heavily invested in LPs, in order to meet cash calls from investors, often sold off the LPs to get the cash they needed to meet those calls. That drove down the unit prices of the LPs, and kicked up the yield.
In addition to having their prices driven down by cash call selling, the LP prices are depressed because they rely on new capital investments to keep growing. That requires loans and new stock issues – things that dried up in the current tight recessionary economy.
But historically, the LPs have outperformed other asset classes, such as stocks. Between 1998 and 2007, LPs beat the S&P 500 average seven out of 10 years.