ACCESSING THE US ENERGY REVOLUTION

Transcription

1 ACCESSING THE US ENERGY REVOLUTION JULY 2014 ETFS US ENERGY INFRASTRUCTURE MLP GO UCITS ETF ETF SECURITIES EMPOWERING INVESTMENT IDEAS

2 2 INTRODUCTION ETF SECURITIES 3 CONTENTS 04 MASTER LIMITED PARTNERSHIPS (MLPs): AN OVERVIEW 06 US ENERGY INFRASTRUCTURE MARKET 10 WHAT ARE MLPs? 12 INVESTMENT CHARACTERISTICS OF MLPs 14 THE SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX 18 MLP INDEX COMPARISON 20 ETFS US ENERGY INFRASTRUCTURE MLP GO UCITS ETF 22 IMPORTANT INFORMATION

3 4 MASTER LIMITED PARTNERSHIPS (MLPs): AN OVERVIEW ETF SECURITIES 5 MASTER LIMITED PARTNERSHIPS (MLPs): AN OVERVIEW ACCESSING THE RAPID GROWTH OF US ENERGY INFRASTRUCTURE Master Limited Partnerships (MLPs) provide key support to the build out of US energy infrastructure, bridging supply and demand and providing supporting infrastructure for the rapidly growing US fracking, shale gas and oil sands industries. THE US ENERGY LANDSCAPE HAS ALTERED DRAMATICALLY IN RECENT YEARS, AS TECHNOLOGICAL ADVANCES HAVE ALLOWED ACCESS TO PREVIOUSLY UNRECOVERABLE SHALE OIL AND GAS AND OIL SAND RESERVES. THIS HAS LED TO A BOOM IN DOMESTIC PRODUCTION AS NEW SUPPLY COMES ON-STREAM AND REDUCES THE DEPENDENCE OF THE US ON IMPORTED ENERGY. TO BRING THIS NEW SUPPLY TO END MARKETS, A VERY SIGNIFICANT BUILD-OUT OF US ENERGY INFRASTRUCTURE HAS BEEN NECESSARY AS THE NEW PRODUCTION SITES ARE OFTEN FAR FROM EXISTING NETWORKS, OR THE EXISTING INFRASTRUCTURE DOES NOT HAVE THE CAPACITY TO COPE WITH THE GROWTH. AS ENERGY PRODUCTION IN THE US GROWS OVER THE COMING YEARS, THERE IS EXPECTED TO BE A HUGE GROWTH IN INFRASTRUCTURE SPENDING AHEAD. STABLE AND GROWING CASH FLOWS Midstream MLPs offer a toll-road type business model, owning and operating many of US core energy infrastructure assets, including pipelines, processing plants and storage facilities. NO FUND-LEVEL TAXATION MLPs offer favourable tax treatment with no corporate level tax and no US dividend withholding tax at the fund level for European investors 1. HIGH DISTRIBUTION YIELD MLPs are publicly traded on US stock exchanges and have consistently offered high yields as they distribute the majority of their operating cash flow. STRONG PERFORMANCE Midstream MLPs have experienced strong performance with annualised returns of around 32% over the last five years 2. DIVERSIFICATION MLP correlation to US equities, WTI crude oil and US natural gas have been 0.63, 0.53 and 0.23 respectively over the past five years 3. MIDSTREAM FOCUS The Solactive US Energy Infrastructure MLP Index offers pure exposure to energy infrastructure MLPs. This sub-segment of the MLP universe has historically provided the highest absolute and risk-adjusted returns. DISTRIBUTION YIELD 9%* PRICE APPRECIATION 8%* TOTAL RETURN 17%* Source: ETF Securities (30 June 2014). 1 Fund must be synthetically replicated to ensure no US dividend withholding tax payable by the fund. *Annualised figures based on performance of the Yorkville MLP Infrastructure Universe Index PR and the Yorkville MLP Infrastructure Universe Index TR. Simulated data from 31 December 1986 to 15 February 2012 and actual data from 16 February 2012 to 31 December Measured by the Solactive US Energy Infrastructure MLP Index TR over the past 5 years based on simulated data from 30 June 2009 to 4 March 2014 and actual data from 5 March 2014 to 30 June US equities proxied using S&P 500 as benchmark, crude oil using the WTI crude oil front month futures contract as benchmark and natural gas using the Henry Hub natural gas front month futures contract as benchmark.

4 6 US ENERGY INFRASTRUCTURE MARKET ETF SECURITIES 7 US ENERGY INFRASTRUCTURE MARKET US ENERGY MARKET: UNDERGOING A REVOLUTION Before 2005, the energy market in the US was highly dependent on foreign imports as domestic production was in decline and unable to fully meet the needs of the domestic market. Recoverable oil and gas from existing reserves was depleting until the application of new techniques called hydraulic fracturing, or fracking. This drastically changed the energy market in the US. In the US, producers have been able to extract oil and gas from sources that were previously thought to be unrecoverable due to inaccessibility, or because they were uneconomical to produce. As the supply of oil and gas increased, refiners, processing facilities and end consumers in the US have been able to benefit from cheaper energy prices compared to the rest of the world. CRUDE OIL 49% OF US REFINERY CRUDE OIL DEMAND IS SOURCED DOMESTICALLY. 34% IS IMPORTED BY WATER AND 17% IS IMPORTED FROM CANADA. ACCORDING TO THE ENERGY INFORMATION ADMINISTRATION (EIA), US SHALE OIL PRODUCTION WILL PEAK AT AROUND 4.8MB/D IN 2020 FROM AROUND 3.5MB/D CURRENTLY. TO SUPPORT THE PRODUCTION GROWTH FROM SHALE OIL, THE INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA (INGAA) ESTIMATES THAT AROUND US$31 BILLION WILL BE SPENT ON OIL MAINLINE PIPELINES BETWEEN 2011 AND NATURAL GAS 95% OF THE NATURAL GAS CONSUMED IN THE US IS PRODUCED DOMESTICALLY. ACCORDING TO THE EIA, US GAS PRODUCTION FROM SHALE IS ESTIMATED TO DOUBLE FROM AROUND 27BCF/D IN 2012 TO 54BCF/D BY TO SUPPORT THE PRODUCTION GROWTH FROM SHALE GAS, THE INGAA ESTIMATES THAT AROUND US$205 BILLION WILL BE SPENT ON INCREASING NATURAL GAS INFRASTRUCTURE CAPACITY IN THE US.

5 UPSTREAM MIDSTREAM DOWNSTREAM NATURAL GAS PIPELINES NATURAL GAS PIPELINES STORAGE VEHICLES NATURAL GAS GATHERING PIPELINES GAS PROCESSING ETHANE / PROPANE / BUTANE / ISO-BUTANE / NATURAL GASOLINE UTILITIES MIXED NATURAL GAS LIQUID (NGL) PIPELINES NGL PIPELINES NGL FRACTIONATION STORAGE INDUSTRY STORAGE CRUDE OIL GATHERING PIPELINES CRUDE OIL REFINING STORAGE RESIDENTIAL USE CRUDE OIL REFINED PRODUCTS PIPELINES UPSTREAM MIDSTREAM DOWNSTREAM ENERGY INFRASTRUCTURE ACTIVITIES IN THE US CAN BE DIVIDED INTO THREE MAIN AREAS: MIDSTREAM MARKET DRIVERS Upstream: Businesses involved in the exploration and production of oil and gas and which are highly exposed to commodity price movements. Midstream: Businesses engaged in the gathering, processing, transportation and storage of oil, gas and refined products which tend to generate more stable revenues than up and downstream businesses. Downstream: Refers to businesses consuming fuel and tend to be highly cyclical and volatile, due to its sensitivity to the price of crude oil or gas as well as the price of the finished products. The Interstate Natural Gas Association of America (INGAA) estimates a total of US$641 billion will be spent to upgrade and expand midstream energy infrastructure in the US. The growing population of the US and the recovery of its economy are key drivers of the long-term growth of US energy infrastructure demand. The increase in US energy production from shale has led to the expansion of US energy infrastructure to connect less well equipped regions to the main grid. MIDSTREAM MLPs PROVIDE KEY SUPPORT TO THE BUILD OUT OF US ENERGY INFRASTRUCTURE, BRIDGING SUPPLY AND DEMAND AND PROVIDING SUPPORTING INFRASTRUCTURE FOR THE RAPIDLY GROWING US FRACKING, SHALE GAS AND OIL SANDS INDUSTRIES.

6 10 WHAT ARE MLPs? ETF SECURITIES 11 WHAT ARE MLPs? MASTER LIMITED PARTNERSHIPS (MLPs) ARE PUBLICLY TRADED PARTNERSHIPS (PTPs) THAT HAVE ACTIVITIES PRIMARILY IN THE ENERGY INDUSTRY. MLPs ARE LISTED ON US EXCHANGES AND ARE TRADED JUST LIKE A STOCK. A SECURITY IN AN MLP IS CALLED A UNIT AND THE HOLDER OF THAT SECURITY, A UNITHOLDER. THE MARKET There are 144 PTPs listed in the US, according to the trade group that represents public limited partnerships (the National Association of Publicly MLP UNIVERSE SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX A KEY BENEFIT OF AN MLP IS ITS TAX EFFICIENCY. An MLP is considered a pass-through entity for tax purposes, which means that tax is not paid at the corporate level if specific conditions are met. Taxes are instead paid by the individual unit holders. Even so, the unit holders are generally better off in terms of tax efficiency than they would be under a more common C-corporation tax structure. MLPs are treated differently to C-corporations, which under US federal income tax law are taxed separately from their shareholders. In addition, an MLP will generally pay out quarterly cash distributions that are treated as a return of capital, whereas distributions from earnings of a C-corporation are treated as dividends for US tax purposes. MLPs are usually considered to be those PTPs that have active operations predominantly in the energy industry. Qualifying MLPs must earn 90% or more of their income from qualified sources. Their activities can include exploration, development and production, mining, processing, refining, storage, transportation, and marketing of minerals or natural resources. Traded Partnership or NAPTP). Of these, 116 are classified as MLPs. The total market capitalisation of the MLP sector is approximately US$591 billion 1. The MLP universe can be broken into two main segments: Infrastructure MLPs and Commodity MLPs. COMMODITY MLPs The Commodity MLP segment consists of MLPs generating the majority of their revenues from either upstream or downstream assets. Compared to Infrastructure MLPs, Commodity MLPs are more closely tied to economic cycles due to their higher correlation to commodity prices. The Commodity MLP segment can be broken into the following sub-segments: Marine Transportation, Downstream, Energy Services, Natural Resources, and Exploration & Production (E&P). MARINE TRANSPORTATION DOWNSTREAM NATURAL RESOURCES EXPLORATION AND PRODUCTION SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX INFRASTRUCTURE MLPs The Infrastructure MLP segment consists of MLPs generating the majority of their revenues from midstream infrastructure assets and operate toll-road like businesses. The business drivers of Infrastructure MLPs are relatively unaffected by economic cycles or changes in commodity prices. The Infrastructure MLP segment can be broken into the following sub-segments: Refined Products Pipelines, Natural Gas Pipelines, Crude Oil Pipelines, and Gathering & Processing. REFINED PRODUCT PIPELINES NATURAL GAS PIPELINES CRUDE OIL PIPELINES GATHERING AND PROCESSING SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX ENERGY SERVICES SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX GENERAL PARTNERS SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX 1 Data as of 30 June Source: NAPTP, Bloomberg, ETF Securities

7 12 INVESTMENT CHARACTERISTICS OF MLPs ETF SECURITIES 13 INVESTMENT CHARACTERISTICS OF MLPs PERFORMANCE MLPs have outperformed major equity and bond benchmarks over the past five years (see chart below), with the Solactive US Energy Infrastructure MLP Index posting an annual return of 32% compared to 19% for the S&P 500, 15% for the MSCI AC World and 5% for the Barclays Capital Bond Composite-Global Index. A closer look at the indices annual performance shows that MLPs have been the best performer every year except in DISTRIBUTION YIELD 1 The tax efficient structure of MLPs allows them to pass on a greater portion of their earnings to investors. Over the last five years, MLPs have been one of the best yielding asset classes, currently around 6%. ANNUAL YIELDS BY ASSET CLASS Solactive US Energy Infrastructure MLP Index TR* Dow Jones Brookfield Global Infrastructure TR Index Barclays Capital Bond Composite-Global Index MSCI AC World S&P 500 WTI Oil US Energy MLP 9.4% High Yield 7.7% High Yield 8.8% US Energy MLP 6.5% US Energy MLP 6.2% 2 Real Estate 3.9% US Energy MLP 6.8% US Energy MLP 6.2% High Yield 6.3% High Yield 6.2% 3 Equities 2.4% Real Estate 3.9% Real Estate 4.1% Real Estate 3.7% Real Estate 3.6% 4 n.a. Sovereign Bond 2.0% Equities 2.2% Equities 2.3% Equities 2.1% 5 n.a. Equities 2.0% Sovereign Bond 1.7% Sovereign Bond 1.3% Sovereign Bond 1.6% 150 RISK / RETURN RATIOS June 09 Sep 09 Dec 09 Mar 10 June 10 Sep 10 DIVERSIFICATION BENEFITS Although MLPs correlation reached an elevated level between 2009 and 2012, these numbers have started to decline over the past 18 months, currently standing around 0.35 for US equities, for natural gas and for crude oil. As such, MLPs low correlation may Dec 10 Mar 11 June 11 Sep 11 Dec 11 Mar 12 June 12 Sep 12 Dec 12 Mar 13 June 13 Sep 13 Dec 13 SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX TR* PERFORMANCE 1 July June % 1 July June % 1 July June % 1 July June % Mar 14 June14 MLPs volatility over the last five years was around 15% at the end of June MLPs volatility is one of the lowest relative to commodities and equities, hence MLPs have offered higher returns for a lower level of volatility, enhancing investors portfolio risk/return ratios. Annualised returns (in %) Bonds HF Managed Futures Infrastructure HF L/S Equity MLPs Annualised volatility (in %) Solactive US Energy Infrastructure MLP Index* Equities Commodities Real Estate Emerging Market provide useful diversification benefits for an investor 1. 1 July June % 1 Data from 30 June 2013 to 30 June year rolling correlation between Solactive US Energy Infrastructure MLP Index TR and S&P 500 Total Return, crude oil futures (spot) and natural gas futures (spot). * The Solactive US Energy Infrastructure MLP Index TR is based on simulated data from 1 January 2009 to 4 March 2014 and actual data from 5 March 2014 to 30 June Source: ETF Securities, Bloomberg 1 Data from 1 January 2009 to 31 December Equities proxied using MSCI World, sovereign bond using Bloomberg Global Developed Sovereign Bond Index, high yield using Bloomberg Global High Yield Corporate Bond Index, real estate using EPRA/NAREIT Developed Index and US energy MLP using Solactive US Energy Infrastructure MLP Index TR* as benchmark. Source: ETF Securities, Bloomberg

8 14 THE SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX ETF SECURITIES 15 THE SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX THE OBJECTIVE OF THE SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX IS TO PROVIDE DIVERSIFIED EXPOSURE TO THE MIDSTREAM SEGMENT OF THE US ENERGY INFRASTRUCTURE MARKET BY ONLY INCLUDING MLPs DEFINED AS INFRASTRUCTURE MLPs. THE INDEX USES A TWO-TIER SELECTION PROCESS: 1 2 It ranks all eligible securities by two separate criteria: Forward looking Distribution Yield : the ratio of the forward looking distribution derived from Thomson Reuters IBES data, divided by the current share price. Distribution Stability : the ratio of the most recent distribution divided by the previous distribution. It selects the top 25 ranked MLPs with an equal weight of 4%. COMPOSITION OF THE INDEX At the end of June 2014, the index had a 36% exposure to Gathering and Processing, 23% to Natural Gas Pipelines, 13% to Crude Oil Pipelines, 12% to Refined Product Pipelines and 16% to General Partners. 16% Gathering and Processing The index is a total return index calculated daily, rebalanced semi-annually, with gross distribution reinvested. 12% 36% Natural Gas Pipelines Crude Oil Pipelines The inception date of the index is 5 March Historical back-tested data available since 30 September Solactive, the index provider, has in just 8 years become one of the key players in the indexing business, specialising in value-added tailor-made indices. US$20 billion is invested in products linked to Solactive calculated indices, including 125 ETFs. 13% 23% Refined Products Pipelines General Partners Source: Solactive, ETF Securities (30 June 2014)

9 16 THE SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX ETF SECURITIES 17 OVERVIEW OF INDEX METHODOLOGY SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX PRICE RETURN TOTAL RETURN ISIN DE000SLA8US6 DE000SLA9US4 WKN SLA8US SLA9US Currency USD USD Bloomberg SOLEIMPR Index SOLEIMLP Index Reuters.SOLEIMPR.SOLEIMLP SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX Midstream focus 25 constituents equally weighted at 4% Rebalanced semi-annually Bloomberg: SOLEIMLP Index Reuters: SOLEIMLP SELECTION POOL Structured as Master Limited Partnerhsips (MLPs) Listed on a regulated stock exchange in the United States Only include MLPs defined as Infrastructure MLPs MLPs must have at least one distribution paid out to unit holders CONSTITUENT WEIGHTS From the selection process, the top 25 ranked MLPs are selected on the rebalancing day LIQUIDITY FILTER Market capitalisation: US$0.5 billion on the rebalancing day Average daily Volume Traded: US$4.0 million in the last three months on rebalancing day SELECTION PROCESS All eligible securities are linked by two seperate criteria 1. Forward looking Distribution Yield based on Thompson Reuters IBES data 2. Distribution Stability based on historical distribution The index is equal weighted with 4% weight to each constituents on the rebalancing day

10 18 MLP INDEX COMPARISON ETF SECURITIES 19 MLP INDEX COMPARISON SOLACTIVE US ENERGY INFRASTRUCTURE MLP INDEX MORNINGSTAR MLP COMPOSITE INDEX ALERIAN MLP INDEX ALERIAN MLP INFRASTRUCTURE INDEX INDEX UNIVERSE Infrastructure & GP Infrastructure & GP Commodity, Infrastructure & GP Commodity & Infrastructure NUMBER OF CONSTITUENTS METHODOLOGY Dividend & Dividend Growth / Equal weighted Dividend-dollar weighted Market Cap. weighted Market Cap. weighted SECTOR WEIGHTINGS General Partner 16% 7% - - Gathering & Processing 36% 17% 15% 30% Infrastructure MLPs Natural Gas Pipelines 23% 26% 31% 29% Crude Oil Pipelines 13% 10% 10% 14% Refined Products Pipelines 12% 21% 19% 27% Exploration & Production - 10% 9% - Marine Transportation - 2% 2% - Commodity MLPs Natural Resources - 1% 1% - Energy Services - - 0% - Downstream - 6% 5% - HIGHEST WEIGHTED STOCK Enbridge Energy Partners LP Enterprise Products Partners Enterprise Products Partners Kinder Morgan Energy Partners LP Index weight 4.8% 10.0% 15.8% 9.6% 5 YEAR ANNUAL RETURN 32% 28% 26% 27% 5 YEAR ANNUAL VOLATILITY 15% 14% 14% 14% 5 YEAR CORRELATIONS WITH S&P US 10 Yrs bonds US real estate WTI Crude Oil (front month futures) Henry Hub Natural Gas (front month futures) Data to 30 June The Solactive US Energy Infrastructure MLP Index TR is based on simulated data from 30 June 2009 to 4 March 2014 and actual data from 5 March 2014 to 30 June Source: ETF Securities, Bloomberg, Index providers websites

11 20 INTRODUCTION ETFS US ENERGY INFRASTRUCTURE MLP GO UCITS ETF ETF SECURITIES 21 ETFS US ENERGY INFRASTRUCTURE MLP GO UCITS ETF First European listed ETF focused on the midstream MLP segment via the Solactive US Energy Infrastructure MLP Index TR. Favourable tax treatment with no taxation at a corporate level. The fund itself is not subject to US dividend withholding tax and is therefore 100% exposed to the index performance. Transparent and robust ETF structure with intraday liquidity. Competitive pricing, with lowest TER among European MLP ETFs (as of 30 June 2014). ETFS US ENERGY INFRASTRUCTURE MLP GO UCITS ETF Dividend treatment Quarterly distribution Base currency USD TER 0.45% Swap fee 0.80% Reference index Solactive US Energy Infrastructure MLP Index TR Reference ticker: Bloomberg: SOLEIMLP Index / Reuters:.SOLEIMLP UCITS compliant Yes Domiciled Ireland LISTINGS LONDON STOCK EXCHANGE DEUTSCHE BOERSE Exchange code MLPI MLPX XMLP ISIN IE00BHZKHS06 IE00BHZKHS06 DE000A1XE2Q3 Bloomberg MLPI LN MLPX LN XMLP GY Reuters.MLPI.MLPX.XMLP Trading currency USD GBP EUR WKN - - A1XE2Q Registered Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Spain, Sweden, and United Kingdom FUND STRUCTURE The ETFS US Energy Infrastructure MLP GO UCITS ETF is an Irish domiciled UCITS ETF using an unfunded swap model which is essential to ensure that US dividend withholding tax is not applicable. Issuer: GO UCITS ETF Solutions Plc Investment Manager: GO ETF Solutions LLP Swap Counterparty: Citigroup Global Markets Limited Administrator: BNY Mellon Fund Services (Ireland) Ltd Trustee: BNY Mellon Trust Company (Ireland) Limited Collateral Manager: The Bank of New York Mellon AP (primary): Citigroup Market Maker (primary): Susquehanna BNY MELLON GLOBAL COLLATERAL MANAGEMENT (TRI-PARTY Title of collateral retained 100% - 110% securities* REPO 100% Cash Cash Cash placed in reverse repo Fund buys Unfunded Swap (pays financing) SWAP PROVIDER (SP) MARKET MAKER/OTC INVESTOR ETF ETF ETF shares AUTHORISED BNY MELLON PARTICIPANT (AP) TRANSFER AGENT (TA) Cash (or Securities Hedge) Cash Cash GO UCITS ETF SOLUTIONS Swap performance * Adjusted daily for market movements

12 22 IMPORTANT INFORMATION ETF SECURITIES 23 IMPORTANT INFORMATION This financial promotion has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited ( ETFS UK ) which is authorized and regulated by the United Kingdom Financial Conduct Authority ( FCA ). The products discussed in this document are issued by GO UCITS ETF Solutions Plc (the Issuer ), an open-ended investment company with variable capital having segregated liability between its sub-funds and is organised under the laws of Ireland as a public limited company. The Issuer has been authorised by the Central Bank of Ireland (the Financial Regulator ) as a UCITS pursuant to the European Communities (Undertaking for Collective Investment in Transferable Securities) Regulations, 2003 and shall issue a separate class of shares (the Shares ) representing each sub-fund. The Shares discussed in this document are issued by the ETFS US Energy Infrastructure MLP GO UCITS ETF (the Fund ). No investment advice ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this financial promotion relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit. No guarantee of accuracy This document may contain independent market commentary prepared by ETFS UK based on publicly available information. 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