In a recent ClearBridge Investments call, Chris Eades, portfolio manager for the ClearBridge Energy MLP Funds, gave his insight on the energy sector. He also provided an overview of the energy stocks he holds in the four main funds he manages which include the ClearBridge Energy MLP Fund Inc. (CEM, Financial), ClearBridge American Energy MLP Fund Inc., ClearBridge Energy MLP Total Return Fund Inc. and the ClearBridge Energy MLP Opportunity Fund Inc. (EMO, Financial).
In the difficult energy sector environment many investors have been seeking alternatives to pure energy stock investments to try and diversify some of the risks lower oil prices are presenting to energy companies. The ClearBridge Energy MLP Funds are a leading investment overall among energy sector mutual funds. The funds have outperformed the energy sector consistently. In a one-year return comparison the ClearBridge Energy MLP Fund Inc. has beaten the energy sector overall returning -24.16% versus the energy sector’s -31.37%.
In remarks from Chris Eades on Aug. 11 he first outlined some of the key reasons the ClearBridge Energy MLP Funds have been able to produce above industry returns. The primary reason for the success of the ClearBridge Energy MLP Funds is that they primarily invest only in infrastructure MLPs. Infrastructure MLPs focus on the storage and transportation of commodities through established pipelines. While they have also been beaten down by the lower energy sector valuations overall they have suffered less than exploration and production companies because their revenue is not directly derived from the price of oil. Secondly, in the industry overall MLPs pay a distribution similar to a stock’s dividend payout in that it adds an extra income component to the company's equity return. In the industry one way many exploration and production MLPs have been able to reduce costs is by lowering their distribution payout rate. Infrastructure MLPs have not suffered as greatly as the exploration and production MLPs and thus can continue to pay higher distributions to shareholders. Overall, the ClearBridge Energy MLP Funds have benefited primarily from these two factors. The funds invest in a portfolio of infrastructure MLP investments that have been less effected by lower oil prices and have also been able to continue paying out higher distributions to shareholders.
Below is a list of the top holdings in the ClearBridge Energy MLP Fund Inc.
In comments from Eades in the ClearBridge Energy MLP Funds call, he also reported his insight on the oil and gas sector and provided his outlook. In his perspective he noted that the most important thing for infrastructure investors to watch in the energy sector is the volume of oil production in the United States. Continued high volumes of oil production will lead to continued gains for infrastructure companies. However, the higher supply volumes have a negative effect on exploration and production companies in the current environment since revenues fall as oil prices descend. Eades noted that oil prices below $50 will make oil production nearly unsustainable for many smaller companies with lower cash flow reserves. Thus, more exploration and production companies will be forced to consolidate. Overall, consolidations in the exploration and production sector have been occurring at a higher rate and this trend is expected to continue as companies find ways to reduce costs in the currently difficult energy environment.
