US-based SL Advisors has launched an ETF version of its American Energy Independence Fund (USAI), a fund that seeks to provide tax-efficient exposure to the American energy infrastructure sector.
Simon Lack, managing partner at SL Advisors, spent 23 years trading interest rate derivatives at JP Morgan before setting up the energy mutual fund three years ago, which is now joined by an ETF. The firm has USD250 million under management, with 90 per cent in the energy sector, which is currently seeing a great deal of growth.
“Energy infrastructure attracted me because you are investing in all the physical stuff that moves energy to the ultimate consumer. Energy is very cyclical but infrastructure is more of a toll model with the key point being that you don’t care about the value of the oil, just the hardware.”
Lack says that the volume of energy consumed in America is very stable and the businesses are more stable than suggested by recent stock price moves. He says that payout growth has dipped in recent years, as businesses have redirected cash flow from distributions to funding new projects.
The Shale Revolution, involving horizontal drilling and fracking for oil and gas, is, he says, quintessentially an American story. “You need the technology, labour force and infrastructure to capture the oil and gas and you also need the private mineral rights.
“In the US, people take for granted that if you find oil in your garden it’s yours which is not true all over the world.” In the US, a landowner has the mineral rights and does a deal with an oil company.
“The shale revolution has been a huge benefit to America,” Lack says. “The country is producing a lot more oil and gas and has become independent in natural gas and imports less crude oil but it needs more infrastructure because the new resources are not always found in traditional locations.”
North Dakota now lights up on a night time satellite picture of north America as they flare the natural gas that emerges as they drill for oil, although improving infrastructure is allowing more of this gas to be captured, reducing flaring, Lack says.
“It’s a good environmental story because natural gas is being used to boost electricity and replace coal as a source of electricity,” Lack says.
“Germany uses renewables, such as solar or wind power, to create electricity but when they are not working their base load energy is still in coal because they have phased out nuclear energy. The irony is that the more they became reliant on renewables, the more they become reliant on coal.”
In the US, the base load is natural gas which Lack says is much cleaner than coal. “This has transformed the business because all these businesses have to keep adding new pieces to their infrastructure.
“The big story is that the growth in hydro carbon production is getting the US to be independent and up there with Saudi and Russia as one of the world’s biggest energy producers,” Lack says.
Lack’s USAI fund invests in a mixture of master limited partnerships (MLP), similar to the LLP in the hedge fund world, but specifically used in the energy sector, and the largest energy infrastructure companies.
“We saw there was a big gap in the market,” Lack says. “Structural changes have reduced the importance of MLPs, and yet many energy infrastructure funds are dedicated to that subsector. As a result, some big corporations may be overlooked. USAI is designed to address the unmet need for a broadly based, tax-efficient way to invest in the infrastructure supporting America’s growing production of oil and gas.”