There is an old and somewhat overused saying about gold rushes; that the real money is made, not by the prospectors, but by those who sell them their picks and shovels. The problem for investors is identifying what the “picks and shovels” are in a modern context. What services are required in industries that are expanding?
There is a “black gold rush” taking place right now in North America as advances in technology have led to the commercial viability of huge oil resources contained in shale fields in several parts of the country. This huge increase in production in the world’s biggest oil consumer is a double edged sword for the big oil companies. Economics 101 tells us that a sudden increase in the supply of something produces a downward pressure on pricing, so it may not be all sunshine and roses going forward, particularly for companies heavily invested in expensive deepwater rigs.
This dynamic makes me wary of investing in traditional oil companies, particularly over the long term, and more inclined to look for alternative ways of playing the boom.
Extracting oil from shale by means of hydraulic fracturing, or “fracking,” is not without controversy in several ways. Firstly the environmental impact of the actual process is still not known, and dealing with the flowback fluid from fracking, as well as the salt water that is a by-product of an oil well, presents a problem. Secondly, many of these new wells are located in areas poorly served by pipelines and new ones will probably be needed.
Anybody who has followed the debate around the Keystone XL project is aware that inspection and maintenance of these pipelines is important and that if a company wants to get approval for a project, they’d better have a rigorous program in place.
If one were to find, then, a company that derived revenue from pipeline inspection and integrity services as well as water treatment and environmental services, it would be worth a second look. Cypress Energy Partners L.P (CELP), who went public less than a month ago is just such a company.
In fact, past revenues have been pretty much evenly split between those two sectors. Cypress is a Master Limited Partnership, or MLP, and is the first such entity for these industries. MLPs, if you are unaware, are structured as “flow through” companies, where the majority of profit is passed directly to shareholders.
As I said CELP debuted on the NASDAQ less than a month ago, so there is no long term record to point to, and investing involves some degree of risk. So far, however, it seems that the market has decided that it is a risk worth taking.
CELP is up just over 15% from the IPO price of $20 and has increased around 10% from its first day close of $21.59. You should understand, however, that with MLPs, your investment is generally more about yield than capital appreciation. It is predicted that the stock will yield around 6% over the next couple of years and that in itself makes it fairly attractive. What appeals to me about CELP, however, is that there could also be some growth potential.
By being the first MLP in their field they could well (forgive the unintended pun!) have given themselves a significant advantage. The saltwater treatment industry in particular is extremely fragmented with hundreds of small operators. An experienced participant with capital at its disposal should have little difficulty finding acquisition targets to pursue growth if they choose to do so. Pipeline inspection is already a huge, growing business and, as permission for new projects is sought here in the US, further growth can be expected.
Even if growth proves elusive, however, every portfolio needs yielding investments to some extent, and I would be quite content to hang on to CELP if the predicted yield is fairly accurate. Add to that a reasonable expectation of capital appreciation from a “picks and shovels” investment and CELP looks like a winner.