FEI：重新审视这个充满希望的以MLP为重点的CEF

Midstream MLPs are an excellent asset class for investors seeking income, but there are few funds available to invest in multiple ones together.

FEI is one fund that does, and it boasts a very high distribution yield to satisfy the income-seeking investor.

The fund is somewhat heavily concentrated in only a few names, which is rather disappointing.

The midstream industry enjoys relatively stable and secure cash flows and significant forward growth prospects.

The fund currently trades at a nice 7.90% discount to net asset value.

One of the best assets for income-focused investors are units of master limited partnerships. This is due to the fact that many of these securities boast yields north of 8%. They are not, however, as well-followed by the investment media as many other types of assets, which may partly explain these high yields. Due to some legal reasons, there are not very many funds investing in these companies, so few investors have much exposure to them. This creates an opportunity for those of us looking to secure a high rate of cash return off of our hard-earned money. One of the easiest ways to take advantage of this opportunity is by investing in one of the handful of funds that does invest in the space, such as the First Trust MLP and Energy Income Fund (FEI). In so doing, we can gain access to a diversified, professionally managed portfolio of these companies in one simple trade and thus receive the high distribution yields that they throw off.

According to its web site, the First Trust MLP and Energy Income Fund has the objective of seeking out a high level of total return with an emphasis on current distributions paid to the fund's common shareholders. The fund does indeed boast a very high distribution yield, so it does enjoy some success at accomplishing this objective. This will be discussed in more detail later in this article. In order to accomplish this objective, FEI invests in a variety of master limited partnerships and similar entities. As the overwhelming majority of master limited partnerships are in the energy sector, particularly in the energy infrastructure sub-sector, we can expect the majority of the fund's holdings to be companies operating in this area of the economy. We can clearly see this by looking at its ten largest positions:

We can see here a few companies that are not, strictly speaking, master limited partnerships. In particular, Kinder Morgan (KMI), TC Energy Corp. (TRP), ONEOK (OKE), and Enbridge (ENB) are all organized as corporations. These entities are, therefore, somewhat different in terms of structure and taxation, but for the most part they do act somewhat like master limited partnerships. Another thing that we notice is that most of these are midstream companies, which is actually a common industry for master limited partnerships to be involved in, due to the fact that midstream companies tend to have much more stable cash flows than other energy companies.

This stability is due mostly to the business model of these companies. Midstream companies are frequently called "toll roads", as the companies' revenues and, ultimately, cash flow directly correlate to the volume of resources that they carry. While the actual model is a bit more complex than this, it basically consists of charging a small fee for each unit of commodities that moves through the companies' infrastructure networks. Thus, to a certain degree, these companies are dependent on the production levels of the nation's upstream companies. Fortunately, the contracts that the midstream companies have with their customers guarantee that a certain volume of resources will be transported. This, therefore, effectively guarantees a certain minimum level of revenue for the midstream company, and thereby, a certain level of support for the distributions that they pay out.

As we can see here, the overwhelming majority of the fund's assets are invested in midstream companies:

Indeed, we can see here that the only industry that accounts for a noticeable percentage of the fund's assets aside from midstream firms is electric utilities. Electric utilities also have a reasonably secure business model, since it seems rather unlikely that people will simply cease paying their electric bills

, and the industry is fairly heavily regulated to ensure a certain level of cash flows. Thus, for the most part we can see that FEI invests its money in conservative assets that should be able to generate reasonably secure cash flows for the owners of the fund.

With that said, there are certainly some potential risks here. As my regular readers on the topic of closed-end funds are no doubt well aware, I generally dislike seeing any single position in a fund account for more than 5% of its total assets. This is because that is approximately the level at which the asset begins to expose the fund to idiosyncratic risk. Idiosyncratic, or company-specific, risk is that risk that any financial asset possesses that is independent of the market itself. This is the risk that we aim to eliminate through diversification, but clearly, if a single asset accounts for too much of a portfolio, then the risk will not be adequately diversified away. Thus, the concern here is that if a company whose securities are too heavily weighted encounters some event that causes its market value to decline, then it will drag down the entire fund with it.

As we can see in the chart above, the fund contains seven assets that each accounts for more than 5% of the total portfolio value. One of these, the common units of Enterprise Products Partners (EPD) account for more than double this 5% threshold. While these are mostly large and financially secure companies, investors in the fund should keep in mind that they are exposed to the individual fortunes of these firms when constructing their own portfolios and should seek to add some diversification elsewhere.

As anyone that follows the midstream industry could likely tell you, the industry has been quite strong over the past few years, as many of the largest firms in the industry have posted consistent revenue and distributable cash flow growth over the period. This is something that I have discussed in several of my previous writings. The primary reason for this growth is the growth in both oil and natural gas production that the United States has been experiencing. As we can see here, essentially every basin in which oil or natural gas is produced has higher output now than it did a year ago:

Of course, as investors we are more interested in the future than in the past. This is due to the fact that new money invested today does not benefit from what happened yesterday. Fortunately, it appears likely that the production growth will continue over the next few years. In a recent presentation, Enterprise Products Partners showed that between now and 2025, the nation's production of natural gas liquids is expected to increase by 54% and the production of crude oil is expected to increase by 46%:

As we have already discussed, midstream companies such as the ones that FEI invests in should benefit from this, because they are the ones that move these incremental resources to the market, and their revenues correlate directly with volumes. Of course, since oil and natural gas pipelines and processing facilities have a limited capacity, midstream companies will need to expand their operations to take advantage of these growth opportunities. This is the reason why we have been seeing so many new pipeline projects over the past two years. Also of note is the fact that contracts for the usage of these new facilities are signed before construction is begun, so the midstream companies can be essentially assured of positive returns off of their growth projects. This should benefit investors in these companies and, by extension, the fund.

One of the major reasons why investors like master limited partnerships is the relatively large distribution yields that these entities tend to boast. Therefore, we might expect FEI to also boast a relatively high yield. This is indeed the case, as the fund currently pays out a monthly distribution of $0.10 per share ($1.20 annually), which works out to a 10.61% yield at the present share price. This is a level that the fund has maintained for the past twelve months, although prior to that it did pay out at a higher rate:

The fact that the fund did have to cut its distributions a year ago is something that may turn potential investors off. However, it is worth noting that there were several midstream companies that cut their distributions over the past few years. The reason for this is not any deterioration in their business prospects, but was rather an attempt to correct a flaw in the partnership financing model that was exposed by 2015's oil bear market. Basically, these companies had been paying out all of their cash flows to investors in the form of distributions, and were entirely dependent on the market being favorable in order to raise capital. The market during those years was not favorable for this, despite the fact that revenues for these companies did remain relatively stable. In order to prevent this problem from happening again, these companies have been converting to a self-funding model and cutting their distributions so that they can finance their own growth projects internally. This is a much more sustainable financing model, although it has annoyed investors by reducing their distributions. Funds like FEI have also been forced to cut their distributions to account for the fact that the fund is receiving less income. This is what we see here.

As is always the case, it is critical for us to ensure that we do not overpay for any asset in our portfolios. This is because overpaying for any asset is a sure-fire way to ensure that we generate sub-optimal returns from that asset. In the case of a closed-end fund like FEI, the usual way to value it is by looking at the fund's net asset value. Net asset value is the current market value of all of the fund's assets minus any outstanding debt. This is therefore the amount of money that the fund's common shareholders would receive if it were immediately shut down and liquidated.

Ideally, we want to purchase shares of a closed-end fund when we can get them at a price that is less than the net asset value. This is because such a scenario essentially means that we are acquiring the assets of the fund for less than they are actually worth. Fortunately, that is the case right now. As of August 30, 2019 (the latest date for which data was available as of the time of writing), FEI had a net asset value of $12.28 per share. However, the fund's shares actually closed at $11.31 as of the same date. Thus, the shares of the fund can currently be purchased at a 7.90% discount to net asset value. This is a reasonably appealing price to pay for the shares.

In conclusion, it may make sense for investors to include exposure to midstream companies and partnerships in their portfolios. This is particularly true for those investors looking to generate an income off of their investments. The First Trust MLP and Energy Income Fund offers a good way to do this with one easy trade, although it does have somewhat concentrated exposure to only a few names. The overall outlook for this industry is quite solid for the next few years at least, and when combined with the fund's current discount to net asset value, there could certainly be a good opportunity here nonetheless.

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.