Last year was tricky to be involved with traditional energy equities and even some income-generating ideas in the space, but midstream assets stood out. That segment of the energy patch is accessible with ETFs, including the Global X MLP ETF (NYSEArca: MLPA).
MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.
Midstream assets stood tall late last year, a theme that could extend into this year. As it is, MLPA is up nearly 3% to start in 2020.
“Despite near term selling pressures, the midstream energy complex’s fundamentals have routinely defied price movements. US oil production grew by 10%, crude exports grew by 6%, and liquified natural gas exports nearly doubled, utilizing nearly all pipeline capacity to transport oil and gas around the country,” according to Global X research.
Additionally, the midstream space is usually more defensive and less volatile than other energy segments due to steady, reliable cash flows. On that note, dividend coverage in the MLPA universe looks solid for this year.
“Dividend coverage ratios for the asset class are cushioned by 30% on average and price-to-cash flow valuations are trading at early-2016 levels of 5x when oil prices were hitting rock bottom,” said Global X. “This leaves room for potential multiple expansion, but the sentiment is detracting from the operating results.”
MLPs don’t make their money based on oil or gas prices. Unlike other energy sector stocks, MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around.
Speaking of big yields, MLPA has that with a yield of 9.11%.
“In light of the fourth quarter jitters, and a rocky year overall, it’s easy for investors to become disenchanted with midstream,” notes Global X. “But the valuations and fundamentals continue to paint a compelling picture. Midstream is one of the most undervalued asset classes across the equity universe. And the strength of the cash flows and dividend coverage makes for a more positive asset class outlook in 2020.”
For more on thematic ETFs, please visit our Thematic Investing Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.