Two ETFs For The Eagle Ford Shale And Permian Basin
The Eagle Ford Shale and Permian Basin, both in Texas, are two of the most oil-rich deposits in the U.S. By some estimates, the Permian Basin accounts for 17 percent of total U.S. crude output.
Eagle Ford, which is located in South Texas, has the potential to be the largest ever oil find in the lower 48 states. Estimates range from 7 billion to 10 billion barrels of recoverable reserves. Some estimates have gone even higher than that.
The boom in U.S. oil production, particularly in Eagle Ford and the Permian Basin, presents opportunities for energy sector investors.
"The increase in production in the region is fostering midstream development, including building new pipelines, expanding
existing pipelines, railcars, trucks, and barges," said S&P Capital IQ in a new research note. "We are positive on midstream companies leveraged to liquids production in the Eagle Ford Shale and Permian Basin."
In the note, S&P Capital IQ extols a bullish stance on a range of master limited partnerships, or MLPs, an asset class that has surged in popularity among income investors in recent years. Not only do MLPs offer significant tax advantages, but the group has become known for being home to a plethora of prodigious dividend raisers.
S&P Capital IQ has five-star ratings on Enterprise Products (NYSE: EPD) and Kinder Morgan (NYSE: KMP), the two largest U.S. MLPs by market value. Those stocks yield 4.4 percent and 5.7 percent, respectively.
The research firm also has four-star ratings on Energy Transfer Partners (NYSE: ETP), Magellan Midstream (NYSE: MMP), Plains All-American Pipeline (NYSE: PAA) and Sunoco Logistics (NYSE: SXL). Investors can get exposure to a range of MLP names through ETFs such as the popular ALPS Alerian MLP ETF (NYSE: AMLP).
The ALPS Alerian MLP ETF was mentioned in the S&P Capital IQ note, though the research firm does not currently rate the ETF. AMLP has $5.98 billion in assets under management and a trailing 12-month dividend yield of 5.72 percent. Kind Morgan, Enterprise Products, Magellan, Plains All-American and Energy Transfer are the ETF's top-five holdings combining for roughly 40 percent of the fund's total weight.
Despite the impressive yield yield basket exposure to multiple MLPs, AMLP features some alarming fees investors need to be aware. AMLP and other MLP ETFs are not structured in the same way as traditional equity-based ETFs. Translation: Most ETFs are structured as registered investment companies. That exempts those products from paying fund-level taxes. AMLP and friends are structured as regular C-Corporations. The fine print shows AMLP had a gross expense ratio of 4.86 percent at the end of last year.
A more traditional avenue for investors looking to get ETF exposure to Eagle Ford and the Permian Basin, would be the PowerShares Dynamic Energy Sector Portfolio (NYSE: PXI), which S&P rates Underweight.
The Underweight rating on PXI is interesting given that S&P is bullish on a fair amount of the ETF's 60 holdings. PXI's top-two holdings are Enterprise Products and Plains All-American. The research firm has five-star ratings on Chevron (NYSE: CVX) and National Oilwell Varco (NYSE: NOV) as well as four-star ratings on ConocoPhillips (NYSE: COP), Marathon Petroleum (NYSE: MPC), Occidental Petroleum (NYSE: OXY) and Phillips 66 (NYSE: PSX).
Chevron, Marathon Petroleum, ConocoPhillips and Occidental are all top-10 holdings in PXI and combine for over 10 percent of the ETF's weight. National Oilwell Varco and Phillips 66 combine for another five percent of PXI's weight.
"Magellan Midstream has two major pipeline projects designed to increase takeaway capacity from the Permian Basin," said S&P. "The partnership's $375 million Crane-to-Houston venture involves transporting crude oil from Crane, Texas in the Permian Basin to its East Houston, Texas terminal for further delivery to refineries or third-party pipelines along the Houston ship channel and Texas City, Texas through its existing crude oil distribution system. The pipeline has a capacity of 250,000 barrels per day. In addition, MMP in conjunction with Occidental is building BridgeTex Pipeline to transport Permian Basin crude oil from Colorado City, Texas to the Houston Gulf Coast area. The system has targeted capacity of 300,000 barrels per day."
PXI has $135 million in assets and an annual expense ratio of 0.65 percent. The ETF has jumped 20.6 percent in the past year.
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