America’s Crumbling Infrastructure (And the MLP Working to Fix It)

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club
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Each year, the average American motorist spends an estimated $324 on car repairs. Many are caused by America’s rough roads. Which is why the American Society of Civil Engineers (ASCE) calls them “pothole repairs.”

If you live in a state where the ground freezes, spring potholes are just something you have to live with. But they’re part of a much larger issue...

America’s crumbling infrastructure.

Right now, the ASCE report card for America’s infrastructure is a D+. Globally, that’s 16th in overall quality.

Why is America’s infrastructure in such bad shape? The answer is simple: we ignore it.

Water supply and wastewater pipes are generally buried underground. Those are easy to ignore. We don’t notice the underside of bridges, and what exposure to road salt does to the steel beams.

It’s even easy to ignore potholes... until you hit one.

Funding America’s road repairs really shouldn’t be a problem. The U.S. has a national gasoline tax. Those tax dollars go into the Federal Highway Trust Fund.

The problem is, every year, Congress has to pass an emergency bill to make the fund whole again.

And at the moment, no one can seem to agree on a long-term fix.

A Proposed Tax Increase

Back in July, Representative Tom Rice (R-S.C.) introduced legislation that would hike the federal gas tax by $0.10 per gallon.

Drivers would receive a $133 income tax credit to offset the impact of higher pump prices. Unfortunately, Rice’s bill simply trades a tax credit for the additional tax raised.

The legislation went nowhere.

A better approach might be to raise the gasoline tax by one or two cents per gallon each year. The average driver wouldn’t notice the difference.

Instead, we now find ourselves in a situation where the $0.184 per gallon tax can’t cover the expense of fixing America’s crumbling bridges and roads.

It’s not just roads and bridges, either. Our trains can’t go fast without the risk of derailing. Meanwhile, Japan recently celebrated the 50th anniversary of the Shinkansen, its famed bullet train, which routinely hits speeds of up to 200 miles per hour.

The U.S. has nothing remotely close to the Shinkansen. Our “high speed” passenger train is Amtrak’s route between Boston and Washington, D.C. It can reach only 150 miles per hour for short stretches in Massachusetts and Rhode Island.

Why? Because railroads laid out the route over a century ago. Back then, trains never even came close to today’s speeds.

In addition, many of the other components on the route are genuine antiques. We’re talking overhead wiring dating back to the early 1900s.

Money Is the Problem

Winston Churchill famously said, “You can always count on Americans to do the right thing... after they’ve tried everything else.”

In the case of our infrastructure, “trying everything else” amounts to doing nothing until the last possible minute. It then becomes a crisis, which is what we are facing now.

For years, politicians have argued about how to come up with the estimated $1.2 trillion needed to fix our roads and bridges. But in the meantime, it’s the average American who is paying the price.

A recent study by the Texas Transportation Institute determined that the average driver spends 42 hours a year sitting on the highway, going nowhere. That’s twice as much as it was back in 1982.

And the cost of all those idling vehicles is absolutely staggering: $160 billion a year. That’s money from lost productivity... extra fuel burned... and additional vehicle wear and tear.

However, many states aren’t waiting around for the federal government to fund highway projects. They are raising state gasoline taxes to pay for them.

Here where I live in Pennsylvania, drivers can expect to pay $0.25 more per gallon by early 2017. That will push Pennsylvania’s gas tax to the highest in the country.

As a result, the state has finally approved a much-needed highway widening project in eastern Pennsylvania. The state is going to widen a 10-mile stretch of U.S. Route 22 from four lanes to six.

The project was supposed to happen nearly 20 years ago.

Back then, the cost would have been $500 million. The state shelved the project, deeming it too expensive. Now, we are looking at a 10-year undertaking...

The cost? A whopping $2 billion - four times the original cost.

That’s the problem with infrastructure. The longer you wait to fix, repair or improve it, the more it costs.

Are there any ways to invest in U.S. infrastructure as a pure play? Yes and no.

Right now, not a lot of money is available at the federal level for infrastructure spending. That may change after the end of next year when a new administration takes over in Washington.

But in the meantime, let’s look at the Yorkville High Income Infrastructure MLP (NYSE: YMLI).

This is a relatively small market cap ($33.86 million) master limited partnership (MLP). However, it has a complete focus on U.S. infrastructure. The fund does sport a very nice dividend yield of 9.15%. But year to date, its units have fallen more than 38%.

Investing in this MLP now means you think infrastructure spending in 2016 is going to increase. I think it will eventually happen... but now might be a little early to buy Yorkville.

As an alternative, I personally like downstream energy MLPs like CVR Refining L.P. (NYSE: CVRR). After all, potholes or not, the American people still need to get where they’re going... and they need oil and gas to do it.

CVR Refining is a small U.S. refiner that sports a fantastic dividend yield of 14.52%. In addition, its unit price has been on the rise.

Over the last three months, CVR’s unit price has increased 20.73%. There are other downstream refiners like CVR. As I said, they are a good alternative to infrastructure funds... at least until we see Congress start to throw some real money at our crumbling infrastructure.

Let’s hope they do it soon.

Good investing,

Dave

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One of Dave’s Favorite High-Yielding MLPs

Longtime readers know that Dave is a big fan of MLPs. And it should come as no surprise - especially in the current oil market. After all, you’re paid a handsome distribution yield for as long as you hold the stock. Let’s take a look at one of Dave’s favorites, Alon USA Partners L.P. (NYSE: ALDW)...

Since he recommended it to Oxford Resource Explorer subscribers in June, shares of Alon USA Partners are up nearly 25%. But this MLP still has plenty of room to run. And according to Dave, fourth quarter results could be very exciting. In the meantime, shareholders will collect a massive 15.5% yield while they wait.

In Dave's words: “It's important to understand that Alon USA Partners' distribution yield is highly variable...

“Like other MLPs, it's completely based on the partnership's distributable cash flow (DCF) in any given quarter. In the case of a pipeline MLP, DCF is fairly constant. However, refineries are subject to maintenance shutdowns and turnarounds. These types of events can have a significant effect on DCF in any given quarter.

“However, Alon USA Partners' dividend rate is relatively safe, as it completed its only scheduled turnaround of the Big Spring Refinery back in 2012. Big profits, which translate into high quarterly DCFs, look like the name of the game for the partnership for the foreseeable future.”

- Alexander Moschina with David Fessler

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