Why infrastructure trumps energy producers in the oil patch

Genevieve Roch-Decter, runs LDIC Inc.'s North American Energy Infrastructure Fund with co-managers Andrew Pink, right, and the firm's chief executive Michael Decter, centre.

It should come as little surprise that energy infrastructure stocks have outperformed energy producers previously year given the dramatic pullback in oil prices.

But the infrastructure space has also done much better – with lower volatility – than the energy sector over longer periods as well (five, 10 and Two decades), in large part due to rising spending and production levels.

Between 2000 and 2007, oil prices averaged about US$40 per barrel. Yet capex in Canadian energy infrastructure rose tenfold, with spending driven by production growth instead of commodity prices.

Spending on energy-related infrastructure for example pipelines, storage, transportation, marketing and processing hit an all-time high in 2013, and really should do so again when 2014 numbers are reported.

“We believe production growth is going to continue, just not at the pace it has over the past 5 years, because price declines are not incentivizing as much drilling activity,” said Genevieve Roch-Decter, who runs LDIC Inc.’s North American Energy Infrastructure Fund with co-managers Andrew Pink and also the firm’s chief executive Michael Decter.

Rising production helped drive the majority of the fund’s holdings to a record year in 2014 when it comes to earnings and cash flow, while dividend growth averaged 17% for that top 10 positions.

The portfolio managers don’t see oil prices going back to US$90 per barrel anytime soon, but that may not affect production. Roch-Decter noted that gas production continues to hit new highs even though prices have been cut in half over the past five years.

“We see a pretty similar scenario for oil,” she said, “We’re just going to be in a lower-cost environment, which is constantly on the fuel revenue, EBITDA and dividend growth for those these companies.”

One big reason behind the relatively?lower volatility offered by energy infrastructure stocks is their cash-flow stability.


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