Broadly speaking, the energy sector was disappointing in 2019, but the midstream segment impressed. Investors banking on more of the same this year can access midstream equities via the Alerian Energy Infrastructure ETF (NYSEArca: ENFR).
ENFR tracks the Alerian Midstream Energy Select Index (CME: AMEI). ENFR acts as a type of hybrid energy infrastructure ETF, which could help investors capture some of the high yields from MLPs but limits the tax hit from solely owning MLPs. Importantly, many midstream MLPs and energy infrastructure companies are working to deleverage their balance sheets.
“The most impressive energy sector performances in 2019 came from the midstream sector. These are the companies that transport and store oil and gas,” reports OilPrice.com. “But within this sector, the midstream corporations turned in outstanding performances, while the midstream companies that are structured as master limited partnerships (MLPs) generally lagged behind.”
Master limited partnerships and midstream companies have been reducing leverage as of late, but what are the benefits of this move? Midstream companies are involved in the gathering, processing, storage and transportation of oil and gas.
Defensive Midstream Space
Additionally, the midstream space is usually more defensive and less volatile than other energy segments due to steady, reliable cash flows.
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 and MLP businesses are included in the ETF strategies because the segment is fundamentally related to the sector company businesses, can potentially increase yield generation and are historically excluded from S&P 500 and Dow Jones Averages, providing another layer of diversification benefits.
In 2019, the “top 20 midstream companies rose by an average of 15.9% for the year, but a different picture emerges if we look at just the midstream corporations. Major midstream corporations like Enbridge, TC Energy (formerly TransCanada), and Kinder Morgan respectively returned 36%, 56%, and 44%. Enterprise Products Partners, the largest MLP, returned 21.9%. TC Energy’s return was the best among the Top 20 midstream companies,” according to OilPrice.com.
For more information on master limited partnerships, visit our MLPs category.
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.