Kayne Anderson Energy Infrastructure Fund, Inc. (KYN) - 2025 Letter

From the Kayne Anderson Energy Infrastructure Fund, Inc. (KYN) - 2025 Letter:

We have made this point consistently in our stockholder letters, but it bears repeating – energy infrastructure plays an essential role in the global economy. These “must run” assets enable society’s modern way of life. These businesses generate material (and growing) levels of free cash flow and are an attractive way for investors to gain exposure to listed real assets. Further, equity investments in energy infrastructure companies provide holders exposure to some of the most consequential (and durable) trends in the global economy, pay attractive dividends and provide an important hedge against higher-than-expected levels of inflation. Putsimply, the case for owning listed energy infrastructure is robust. One of the most important points we want to convey in this letter: We believe KYN has the potential to generate low-to-mid-teens annual returns over the next five years. Given recent developments in the energy infrastructure sector, our confidence in this scenario has increased over the last year. Our expectations are underpinned by improving demand growth trends, increased project backlogs and growing earnings and free cash flows for the Company’s portfolio investments.

[While subject to numerous assumptions, the primary considerations incorporated into these target returns are estimated dividend yields from portfolio holdings of 4% to 6%, estimated annual growth in dividends and cash flows of 5% to 7%, and estimated annual “excess” free cash flow of 0% to 3% for KYN’s portfolio investments. After incorporating the impacts of fees, expenses and leverage, Kayne Anderson views KYN as having the potential to generate 10% to 15% annual returns on a net basis for investors.]

Pipelines - Q4 2022 Earnings Season

Magellan Midstream Partners (MMP) reported results earlier this month. Highlights from the results and conference call: 

• "[N]et income of $187 million for fourth quarter 2022, compared to $244 million for fourth quarter 2021. The 2022 results were negatively impacted by a $58 million non-cash charge for the impairment of our investment in the Double Eagle pipeline joint venture."
• "Diluted net income per unit excluding mark-to-market (MTM) commodity-related pricing adjustments, a non-generally accepted accounting principles (non-GAAP) financial measure, was $1.06 for fourth quarter 2022, or $1.34 excluding the 28-cent negative impact of the Double Eagle impairment. These results exceeded the $1.22 guidance provided by management last fall primarily due to higher-than-expected refined products transportation revenues and improved commodity margin resulting in part from additional blending volumes during the quarter."
• Distributable cash flow (DCF), a non-GAAP financial measure that represents the amount of cash generated during the period that is available to pay distributions, was $345 million for fourth quarter 2022, compared to $297 million for fourth quarter 2021. Free cash flow (FCF), a non-GAAP financial measure that represents the amount of cash available for distributions, additional expansion capital opportunities, equity repurchases, debt reduction or other partnership uses, was $324 million during fourth quarter 2022, versus $291 million during fourth quarter 2021.
• "Magellan wrapped up the year with another solid quarter, supported by record refined products transportation volumes and financial results that exceeded our expectations. During 2022, we delivered over $1.3 billion of value to our investors via opportunistic equity repurchases and Magellan's attractive cash distribution, marking 21 years of continuous annual distribution growth," said Aaron Milford, chief executive officer.
• Refined products operating margin was $303 million, consistent with the prior-year quarter, as higher financial results from this segment's core fee-based transportation and terminals activities were offset by unfavorable MTM adjustments on our commodity hedge positions. Transportation and terminals revenue increased $26 million primarily due to higher average transportation rates and record quarterly transportation volumes. The higher rates were largely driven by our 6% average tariff increase in July 2022. In addition, customers took advantage of the extensive connectivity of our pipeline system to overcome various supply disruptions in the Midcontinent and Texas regions during the current period, resulting in a higher proportion of long-haul shipments.
• Annual DCF was $1,128 million in 2022, or 1.3 times the amount needed to pay distributions related to 2022, compared to $1,118 million in 2021. Annual FCF was $1,486 million during 2022 versus $1,316 million during 2021.
• For the year, Magellan declared cash distributions of $4.17 per unit for 2022 compared to $4.13 for 2021, representing 21 years of uninterrupted annual distribution growth since our initial public offering in 2001. Recognizing that investors value steady increases to the cash distribution, management currently targets annual distribution growth of 1% for 2023, consistent with the increase provided over the last two years.
• During fourth quarter 2022, we repurchased 1.9 million of our common units for $95 million, resulting in nearly 9.6 million units repurchased during 2022 for $472 million. Magellan has repurchased 26 million units for $1.27 billion under our $1.5 billion equity repurchase program over the last three years, representing an 11% reduction in units outstanding. 
• Our 2023 DCF guidance of $1.18 billion would represent an increase of 13% over our DCF of $1.044 billion in 2020, the year we initiated unit repurchases. Assuming no additional repurchases in 2023, DCF per unit for 2023 based on our guidance would equate to approximately $5.80 per unit, an increase of 25% over 2020. Given management's current expectation that FCF after distributions will generally be used to repurchase units (subject to the considerations noted in "Capital allocation" above), DCF per unit is expected to continue increasing at a higher rate than DCF.
• We plan to increase our annual distribution by 1% this year, similar to the past two years, which results in a yield of nearly 8% based on recent MMP trading prices. While we're not providing specific financial guidance beyond 2023 at this time, we expect DCF to continue to grow modestly over the next few years. Combining this modest underlying growth with our expectation to continue to repurchase units results in even higher growth potential for our distributable cash flow per unit as we have seen in recent years. For example, our DCF grew at an average annual rate of just under 4% between 2020 and 2022, while our DCF per unit grew at an annual average rate of just over 8% during the same period. This example, we believe, demonstrates the power in our capital allocation approach and our ability to create long term value for our investors through a healthy current distribution combined with the potential for capital appreciation as DCF per unit increases.
  

They shipped 145 million barrels of refined products in Q4 2022 versus 142 million in Q4 2021 and 131 million in Q4 2019. (Yet more evidence that the EIA is wrong about energy consumption.) Aviation fuel volume hit 9 million barrels this quarter, not quite back to the 11 million in Q4 2019, but a big recovery from 5 million in Q4 2020. Revenue per barrel of refined product shipped was $1.88 in the fourth quarter vs $1.66 in the fourth quarter of 2019.

The current market capitalization of Magellan is $10.9 billion and enterprise value is $16 billion. Their guidance of $1.18 billion of distributable cash flow for 2023 implies a shareholder yield of 10.8% on the current price. Units are trading for 10 times the Q4 annualized net income (excluding the impact of the non-cash Double Eagle impairment).

Over the three year period from December 2019 through December 2022, the CPI rose by 15%. Magellan's revenue per barrel of refined product shipped rose 13% - not quite as much. Corporate level general and administrative expense rose 34% (ouch). Operating expense for the refined product segment was flat and for the crude oil segment it rose 7%. As the company mentioned, above, the distributable cash flow has risen only 13% since 2020, a bit less than inflation.

Adjusted EBITDA for the full year 2022 was $1.43 billion, up only slightly from the 2021 level of $1.42 billion. (It is still below the 2019 level of $1.58 billion.)

We do have to keep in mind that Magellan sold 26 refined petroleum products terminals last summer for $435 million. That divestment would have reduced earnings somewhat, and the proceeds were used to buy back units, which is an example of something that has allowed Magellan's DCF/unit to grow faster than DCF alone.

Also, like many businesses, Magellan's ability to raise prices follows inflation with a lag. Prices are reset at intervals, contracts are renegotiated, and so forth. On this quarter's conference call, they said that they will raise their refined product rates an average of 8% this summer, an amount that will obviously exceed the current rate of inflation.

We want the earnings of our pipeline investments to grow faster than inflation. We can be patient and they will still work out nicely if there is a lag, but we want revenue to at least match inflation and earnings to grow faster than inflation.

Enterprise Products Partners (EPD) also reported results last week. Highlights from the results and conference call:

• Enterprise reported net income attributable to common unitholders of $5.5 billion, or $2.50 per unit on a fully diluted basis for 2022, compared to $4.6 billion, or $2.10 per unit on a fully diluted basis for 2021. 
• Distributable Cash Flow ("DCF") increased 17 percent to $7.8 billion for 2022 compared to $6.6 billion for 2021.
  
• Adjusted cash flow provided by operating activities ("Adjusted CFFO"), increased 13 percent to $8.1 billion for 2022 compared to $7.1 billion for 2021. Enterprise’s payout ratio of distributions to common unitholders and partnership unit buybacks was 54 percent of Adjusted CFFO in 2022. Adjusted Free Cash Flow ("Adjusted FCF") was $3.0 billion for 2022. Excluding $3.2 billion used for the acquisition of Navitas Midstream Partners, LLC ("Navitas Midstream") in February 2022, the partnership’s payout ratio of Adjusted FCF was 71 percent for 2022.
• Enterprise increased its cash distribution 5.4 percent to $0.49 per common unit with respect to the fourth quarter of 2022 compared to the distribution declared with respect to the fourth quarter of 2021.
• Enterprise finished 2022 with a solid fourth quarter, reporting record total gross operating margin. Our quarterly results were driven by record total pipeline transportation volumes of 11.5 million BPD, on a barrel equivalent basis, higher NGL and natural gas pipeline transportation volumes, higher natural gas processing margins and increased fee-based gas processing volumes. 
• Gross operating margin for the NGL Pipelines & Services segment increased 17 percent to $1.3 billion for the fourth quarter of 2022 compared to $1.1 billion for the fourth quarter of 2021.

These Enterprise results are clearly superior to those of Magellan, with earnings, cash flow, and distributions growing by much higher percentages (matching or exceeding inflation).

The current market capitalization of Enterprise is $57 billion and enterprise value is $86 billion. The $7.8 billion of distributable cash flow for last year implies a shareholder yield of 10.8% on the current price. Units are trading for just under 10 times the Q4 2022 (annualized) net income.

The November investor presentation had a great slide showing the growth in EPD's adjusted FCF per unit:

Their "adjusted" free cash flow metric excludes cash used for acquisitions, such as last year's $3.2 billion acquisition of Navitas Midstream. That is reasonable, since when we talk about free cash flow, we are interested in the amount of cash that is produced by the business and available for owners to reinvest. So, we deduct the expenses for maintenance that are necessary to keep the business running as-is, but we can add back what was spent expanding the business.

The November presentation also had a good discussion of the so-called "energy transition."

The EPD investor presentation even cites Vaclav Smil's book How the World Really Works (previously, on CBS) on one slide!

Pipeline Earnings ($MMP $EPD) - 2021

[Previously regarding pipeline investments: Hydrocarbon Royalties and Pipelines, Magellan Midstream Partners, L.P. (MMP), and  Pipeline Earnings - Q3 2021.]

Some great comments on our pipeline companies' fourth quarter earnings calls. Start with the CEO of Enterprise Products, Jim Teague, on the EPD Q4 call:

I'll finish with our thoughts on the changing sentiments around oil and gas. For some time now, the sentiment toward all traditional forms of energy, especially in political circles has been very negative. Many said that the world should pull the plug on traditional energy as soon as possible and completely devote our capital and efforts toward renewable energy.

Without a doubt, this was always naive. The world now realizes that an overnight transition to renewable sources of energy is not at all possible as evidenced by the rapid development of various global crises, including high natural gas and LNG prices, high crude oil prices and not seen since 2014 and runaway inflation, not seen for about 40 years. Europe is starved for gas and is faced with heat or eat, while Russia, with its major oil and gas supplier, is amassing troops on the Ukraine border. Try as you may, it's hard to blame this crisis on the pandemic.

Over one-third of the world lives in energy poverty, mainly in developing countries. Europe's energy policies have now made energy poverty a reality in first-world countries. As an oil analyst said, energy is the economy. We, in the United States, live in a country of plenty.

We are a rich nation with the high quality of life of creative culture, now also blessed with abundant energy. Maybe that has distorted our thinking about the situation in other countries or regions. People who don't want developing nations to have what we have are either in denial, hypocrites, or both. At Enterprise, we've been outspoken that is going to take all of the above, not for a few years, but for decades to come.

Look to comments made by a variety of sources, everyone from the IEA to the head of Saudi Aramco, members of the European Union, and even the U.S. energy secretary. Ultimately, they all message the same thing. Investment in oil and gas needs to ramp up sharply in order to provide the badly needed baseload traditional sources of energy that will be needed alongside low carbon fuels and green energy to meet the world's growing demand.

And then the CEO of Magellan, Michael Mears, had an amusing comment on the MMP Q4 call about the

James Carreker
Okay. I thought that might be the case. Just wanted to clarify. And then I guess, kind of, a big picture question, and I know we've gotten away from talking about growth versus normal and x growth projects. But when you look at the 2022 refined product outlook, I guess taking into account growth projects that you put into place, like how normal does that feel relative to, say, 2019 levels? Does that feel like we fully caught up? Do you think there's still some parts of the economy holding back when you look at that 2022 number?

Mike Mears
Well, I don't have the numbers in front of me, but I think just directionally, on gasoline, we aren't quite back to 2019 numbers. Diesel fuel is strong and probably above 2019 numbers, and jet fuel, obviously, still not back to 2019 numbers. But I don't have any kind of percentages on my fingertips here to give you on that. And when I say gasoline is not there. I'm not talking about a big miss, I'm talking about it's not above where we were in 2019. And I think -- and again, and I've talked about this before, it really gets into the geography. I mean, as I said, in the rural markets, it's there. In the cities it hasn't quite gotten back there. I mean you still have businesses that don't have people back to work, which is surprising to us, but it's true. And so I think there's still a little bit of a lag there.

Here are the valuation figures and earnings projections last time we checked on EPD and MMP in November:

• EPD market cap was $50 billion and EV was $78 billion. For the first nine months of 2021, Enterprise had earned $3.6 billion, had $6.3 billion of EBITDA, and $4.9 billion of distributable cash flow. The first nine months' annualized earnings ($4.8 billion) looked like an 9.6% earnings yield.
  
• MMP market cap was $11.3 billion and EV was $16.7 billion. For the first nine months of 2021, Magellan earned $738 million, had $1 billion of EBITDA, and $821 million of "distributable" cash flow after maintenance capital expenditures. They had paid $685 million of distributions and repurchased $473 million of LP units for a total of $1.16 billion returned to shareholders through the third quarter. Their first nine months' annualized earnings ($984 million, FY 2021 guidance of $975 million) looked like an 8.7% earnings yield.
  

MMP ended up earning $982 million in 2021, including $244 million in the fourth quarter. The current earnings yield is 9.4% with the stock basically unchanged since early November. During fourth quarter 2021, the partnership repurchased nearly 1.1 million of its common units for $50 million, resulting in a total of 10.9 million units repurchased during 2021 for $523 million.

EPD ended up earning $4.6 billion and had distributable cash flow of $6.6 billion. The current earnings yield is 8.7% with the stock up about 5% since early November.

Pipeline Earnings - Q3 2021 ($MMP $EPD)

[See previously Hydrocarbon Royalties and Pipelines and Magellan Midstream Partners, L.P. (MMP).]

Two of our pipeline companies, Enterprise Products Partners and Magellan Midstream, reported their Q3 earnings (EPD, MMP) yesterday.

Magellan
Current market capitalization is $11.3 billion and enterprise value is $16.7 billion. For the first nine months of 2021, Magellan earned $738 million, had $1 billion of EBITDA, and $821 million of "distributable" cash flow after "maintenance" capital expenditures. They have paid $685 million of distributions and have repurchased $473 million of LP units for a total of $1.16 billion returned to shareholders year to date.

So, Magellan's past nine month's annualized earnings ($984 million, current guidance is for $975 million) would be an 8.7% earnings yield on the current market cap. Magellan shares trade at the same price that they did in 2013 ($50). What is interesting is that TTM net income then was only $580 million, about 60% of what it should be this year, and the dividend then was a third of what it is now. Which meant that the dividend yield then was around 3% vs over 8% today.

This snippet, in response to a question, was what I thought was most interesting from the Q3 earnings call:

But if you look at the rest of our system, in particular, in Texas, if there is demand growth in Texas, which happens to be especially the Dallas Fort Worth area, one of the fastest-growing areas in the country, we have plenty of capacity to accommodate that without -- well speaking about Dallas, without really any capital investment. And when you think about West Texas and access to Mexico and Arizona, markets are further west. We have opportunities there to expand capacity also. So there are upsides around our system. The other thing I mentioned, I've mentioned this before that as we go through an energy transition cycle over the next five or 10-years, it's reasonable to assume that you have more refinery rationalization. And typically speaking for a pipeline company that is a net positive, because it creates incremental transportation opportunities basically to fill the hole that if a refinery closure is creating. And we have a system that's ideally situated for that since we're connected to half the refining capacity in the country. And so, we're not supply constrained in any way. So if we have a refinery close in a certain market, we've got plenty of sufficient supply. And in most cases, sufficient capacity to fill that hole with barrels removed over a longer haul, which is typically a higher tariff. So, I think we do have operating leverage going forward around our refined product system.

I was most glad to see that net income for the first nine months of 2021 has exceeded the first nine months of 2019 ($738 million vs $734 million). We like when our "dying businesses" have growing earnings. (Of course, the bond market never agrees that these businesses are dying. Magellan's debt due 2050 yields only 3.5%.)

Magellan shipped 142 million barrels of refined products in Q3 2021 versus 136 million in Q3 2019. Even though aviation fuel fell from 11 million barrels to 8.4 million, gasoline rose from 75 million to 80 million and distillates rose from 47 million to 53 million. Revenue per barrel of refined product rose from $1.62 to $1.72 per barrel.

Their crude oil pipelines are operating below capacity, with shipping on their 100% owned pipelines falling from 79 million barrels in Q3 2019 (at 94 cents per barrel) to 40 million in Q3 2021 (at 80 cents per barrel). Their BridgeTex pipeline volume has fallen from 41 million barrels (Q3 2019) to 29 million (Q3 2021).

So it's interesting that the refined products pipelines have carried the company back to 2019 earnings even with crude oil volumes lagging. (Refined products made $240 million operating income in Q3 2019 vs $272 million in Q3 2021. Crude oil made $154 operating income in Q3 2019 vs $112 million in Q3 2021.) Magellan should make a lot more money if and when production in the Permian basin increases.

Enterprise
Current market capitalization is $50 billion and enterprise value is $78 billion. For the first nine months of 2021, Enterprise earned $3.6 billion, had $6.3 billion of EBITDA, and $4.9 billion of distributable cash flow.

So, Enterprise's past nine month's annualized earnings ($4.8 billion) would be an 9.6% earnings yield on the current market cap. Magellan shares trade at the same price that they did in early 2014 ($22). At that time, the TTM net income had been only $2.6 billion, about 53% of what it should be this year, and the dividend then was about half of what it is now. Which meant that the dividend yield then was just under 4% vs almost 8% today.

Here is the most interesting snippet from the Q3 earnings call:

Our businesses continued to perform extremely well during the third quarter. We reported $2 billion of EBITDA even though we were impacted by $30 million of headwinds due to hurricane Ida. Cash flow from operations was a record $2.4 billion, which more than fully funded both our capital expenditures and our distributions. Year-to-date distributable cash flow is almost $5 billion, which has provided coverage of 1.7x and $2 billion in retained cash year-to-date. As we head into the final quarter of the year, while we don't take anything for granted, it looks like our businesses are going to finish with another strong year in 2021. Our results reflect the ongoing recovery in demand for crude, NGLs, primary petrochemicals and refined products as the global economy continues to recover. For 2022, most experts agree on continued strong demand and economic growth worldwide. We believe that economic backdrop plus the need to restock virtually everything will continue to provide strong demand growth for oil and gas, natural gas liquids and plastics. In addition to the record cash flow from operations, we had record profits from our propylene business, which contributed to the record gross operating income for our petrochemical and refined product service sector. Our PDH and splitters complement one another in our value chain, and we were able to take advantage of strong propylene spreads. Long term, petrochemical fundamentals are very strong and U.S. petrochemicals have multiple competitive advantages compared to almost all of their global peers. And likewise, Enterprise remains strongly positioned to provide the petrochemicals midstream services, including feedstock, storage, distribution and exports. It's a footprint that's not easily copied. Our liquids pipelines have substantially recovered to near pre-pandemic levels at 6.3 million barrels a day with gas processing volumes benefiting from higher prices for NGLs. Enterprise's natural gas pipeline and transportation for the third quarter exceeded pre-pandemic 2019 levels at a record 14.6 Bcf a day.

As at Magellan, Enterprise's net income for the first nine months of 2021 has exceeded the first nine months of 2019 ($3.6 billion vs $3.5 billion). Gross operating margin for the NGL Pipelines & Services segment (the largest) are up slightly vs 2019, Crude Oil Pipelines & Services and Natural Gas Pipelines & Services are both down somewhat, and then the Petrochemical & Refined Products Services segment earnings are up 42% since 2019, bringing overall gross operating margin to $2.08 billion for the quarter vs $2.05 billion two years ago.

People are unhappy with Enterprise for refusing to buy back units and for spending money on growth capex when units are trading so cheap.

Convexity Idea
It is really interesting that these pipelines yield so much more than they did in 2014, especially with interest rates lower. Magellan yielded 2.9% when the ten year bond yielded 2.4%. Now the ten year yield is 1.6% and Magellan yields 8%. The story with Enterprise is basically the same.

What if these pipelines re-valued? Suppose that gasoline consumption and vehicle miles traveled hit new all time highs next year. Even without growing earnings, if Magellan traded to a 5% dividend yield (where it was in 2017-2018), that would be 60% upside to the current share price, or $80. A $60 call for Jan 2024 last traded for $1.30. If the stock revalues between now and then, that's 15x upside. [An ATM $50 call has IV of only 13% and trades for $4. That would be 7.5x upside with breakeven at $54 - MMP traded at $53.5 in June.]

What's interesting about these calls is that they have upside to improving fundamentals and lower dividend yields but they are also an option on inflation. How much might the currency devalue between now and January 2024? Is 13% implied volatility the right price? 

Note the last two comments on our Rethinking Inflation post, recent quotes from the two smartest options traders that we know: the "distribution of future inflation has a fat right tail" and "Implied Volatility is way too low since the range of outcomes is now much wider."

Bibliographies on Timber, Tobacco, Alcohol, Pipelines, and Utilities

Timber

• Norwegian Wood: Chopping, Stacking, and Drying Wood the Scandinavian Way
• The Age of Wood: Our Most Useful Material and the Construction of Civilization
• A Landowner's Guide to Managing Your Woods
• Mass Timber: Design and Research
• The Trees of North America (Michaux and Redoute's American Masterpiece) 
• The Story of Trees: And How They Changed the World
• The Architecture of Trees  
• Harvest Your Own Lumber: How to Fell, Saw, Dry and Mill Wood 
• Lumber Manufacturing: The Design and Operation of Sawmills and Planer Mills
  

Tobacco

• The Cigarette: A Political History
• Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris  
• The Cigarette Century: The Rise, Fall, and Deadly Persistence of the Product That Defined America
• The Rediscovery of Tobacco: Smoking, Vaping, and the Creative Destruction of the Cigarette 
• Tobacco in History: The Cultures of Dependence
• Merchants of Doubt: How a Handful of Scientists Obscured the Truth on Issues from Tobacco Smoke to Climate Change
• Tobacco: A Cultural History of How an Exotic Plant Seduced Civilization 
• The Gilded Leaf: Triumph, Tragedy, and Tobacco: Three Generations of the R. J. Reynolds Family and Fortune
• The People Vs. Big Tobacco: How the States Took on the Cigarette Giants 
• The Devil's Playbook: Big Tobacco, Juul, and the Addiction of a New Generation
• Going Down Tobacco Road: R. J. Reynolds' Tobacco Empire: The Gold Leaf and North Carolina
  
• Golden Holocaust: Origins of the Cigarette Catastrophe and the Case for Abolition
• Sacred Gifts, Profane Pleasures: A History of Tobacco and Chocolate in the Atlantic World

Alcohol

• Drink: A Cultural History of Alcohol
• A Short History of Drunkenness: How, Why, Where, and When Humankind Has Gotten Merry from the Stone Age to the Present
• Quench Your Own Thirst  
• Intoxication: The Universal Drive for Mind-Altering Substances
• Out of It: A Cultural History of Intoxication
  

Pipelines 

• Pipeline Rules of Thumb Handbook: A Manual of Quick, Accurate Solutions to Everyday Pipeline Engineering Problems
• Natural Gas Processing from Midstream to Downstream 
  

Utilities 

• Principles of Public Utility Rates
• Regulating Public Utility Performance: The Law of Market Structure, Pricing and Jurisdiction  
• Principles of Utility Corporate Finance
  

Hydrocarbon Royalties and Pipelines

I'm interested in mineral landowners (energy royalties, previously 1, 2) and pipelines as being possibly the best part of the hydrocarbon value chain.

They generate cash and distribute it to shareholders, which removes the reinvestment risk. The explorers and producers have trouble creating as much long term value for shareholders because management's incentives are bad. They get paid to grow asset size, and they only have the money to do that at the top of the cycle when properties are expensive.

Refiners have huge operating leverage and volatile capacity utilization. (Valero, for example, has single digit operating margins.) It is hard for them to make money unless their fragmented industry is at capacity. 

Like tobacco, there is the mistaken perception that the oil business is dying. And some fraction of investors even think it is morally questionable to invest in producing the energy that our civilization runs on.

Notice how much more consistent the net income of a pipeline company (MMP) or a royalty company (DMLP) is than an E&P company (DVN) or a refiner (VLO).

Pipelines and royalties seem like the superior part of the hydrocarbon value chain. They are more consistently profitable over time, have less reinvestment requirement, and so more consistently send cash to shareholders.