“This [Ed. report] answers the question from yesterday. But I would argue that the MLPs are a better way to play this theme. The US oil infrastructure was built for oil imports and storage. Now there is a massive shift (30 Billion spend next year) to pipelines and storage from domestic supply, both oil and nat gas. There are MLPs focused on delivery, transportation, gathering from the wells and storage etc. Many of these have little if any commodity price sensitivity and actually have escalating contracts that make the more like a toll road. I believe I sent you the MLP updated report yesterday.

Americans have not noticed yet that MLPs are, as far as I know, going to be the only asset class to escape the majority of the Obama tax hikes on investment. Since the payment is a distribution an not a dividend, in most cases 80-90% is considered a return of capital for taxation purposes and actually reduces your cost basis as opposed to paying current tax. You pay the tax as long term gain when you sell. Another big point is that you will not be paying the 3.9% Obamacare additional tax on a current basis. If you can wait to sell until a few capitalists are back in charge of the US Govt and these socialists are back on the ash heap of history, you may avoid it all together. :+)

Eoin Treacy's view Thank you for this informative email and educative report. Here is a section:

Building growth on a base of unconventional production creates a number of challenges for the industry, which is important to consider in regards to economic decision making. First, the hyperbolic decline curve of tight reservoirs (oil or gas) createa challenge to growth. Single well profiles decline rapidly from high initial productionrates. While positive for net present value as wells achieve payout rapidly (vs. linear,lower rate wells) the challenge is to build and grow a production base from the sum ofhigh decline wells. This dynamic contributes to two factors that serve to limit andreduce returns from the unconventional upstream. First, the prerogative to growproduction and cash flow means capital commitments extend far beyond a single welland into a multi-year developments. Second, capital is reluctantly withdrawn from playswhen returns compress as production declines are likely to rapidly ensue.

Diverging commodity prices have also created a challenging environment for the upstream as the production mix is a significant driver of underlying economics. At the well level, the commodity mix also has an impact on flow rate and the ultimate net present value of the resource (gas & NGLs will flow at higher rates, but contribute lowervalue). In addition, the production decline characteristics outlined above, this dynamicis a significant driver of capital efficiency for the upstream. Below we outline capitalefficiency in terms of capital deployed vs. revenue generated over the first 24 months (2years). At the assumed commodity prices (approximating the current forward curve) thehighest efficiency ($/revenue) is still generated by higher rate liquids (NGL) wells vs.many of the oil focused plays in our sample size. Accelerating returns and capitalefficiency continues to remain a key driver for the equities and an area of market focus.

Thanks also for reiterating my point that pipelines have been among the most reliable beneficiaries of the boom in unconventional oil and gas production.

The favourable tax treatment of the MLP sector is an important consideration as the deadline for the fiscal cliff approaches and may help to explain why many MLPs have held up reasonably well despite anxiety in other sectors.

The above report highlights the expected production from fields that are already being developed. It lists additional technological innovations as a potential bullish catalyst to production estimates, However as David discussed yesterday, the release of government held land for exploration also represents significant potential supply growth and is dependent on government policy .

Of the shares mentioned in this report EOG Resources is particularly noteworthy. It posted a new four-year high this week and a clear downward dynamic would be required to question medium-term scope for further upside.

Here is a link to the MLP focused report mentioned in the above email.