Capitalize On The U.S. Oil Boom With Yield-Generating MLP ETFs

by: Tom Lydon

As the U.S. overtakes Russia as the world's largest producer of oil and natural gas, exchange traded fund investors could take advantage of the growing revenue streams from master limited partnerships.

The U.S. extracted about 22 millions a barrels a day of oil, natural gas and related fuels in July, whereas Russia puts its 2013 oil and gas production at around 21.8 million per day, the Wall Street Journal reports.

The recent surge in U.S. output is attributed to new "fracking" techniques in shale-rock formations of oil and natural gas that were previously unmanageable. Specifically, supply from Bakken oil field and the Eagle Ford shale formation continues to rapidly increase.

"The increase in production in the region is fostering midstream development, including building new pipelines, expanding existing pipelines, railcars, trucks, and barges," S&P Capital IQ said in a research note earlier this year. "We are positive on midstream companies leveraged to liquids production in the Eagle Ford Shale and Permian Basin."

As the U.S. extracts more oil, master limited partnerships, which specialize in transporting oil and gas, could benefit from the increased volume, generating greater revenue and potentially increasing dividend payouts for investors.

MLPs build, acquire and operate transportation assets. While investors link MLPs with energy, specifically natural gas and crude oil, they are more involved with transporting the commodities. Consequently, the performance of MLPs is less dependent on commodity prices than on how much of the commodity is pushed through.

The largest MLP-related ETF, Alerian MP ETF (NYSEARCA:AMLP), has $6.9 billion in assets under management. AMLP has a 5.96% 12-month yield. The ETF's top holdings include Enterprise Products Partners (NYSE:EPD) 9.5%, Kinder Morgan Energy Partners (NYSE:KMP) 9.2% and Magellan Midstream Partners (NYSE:MMP) 7.2%.

"We see EPD benefiting from several potential catalysts, including its strong presence in shale plays, growing NGL production, export opportunities, and its $8 billion of major growth projects under development for the next two-and-a-half years, which we expect will support growing distributions," according to Tanjila Shafi, equity analyst at S&P Capital IQ.

Max Chen contributed to this article. Tom Lydon's clients own shares of AMLP.

Disclosure: I am long AMLP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.