While oil prices gyrate and some equity-based energy exchange traded funds tumble, the Alerian Energy Infrastructure ETF (NYSEArca: ENFR) has been a solid performer in the energy patch this year and much of that bullishness is attributable to midstream exposure.
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.
While midstream players remain important drivers of the MLP investment thesis, this space is changing and investors need to be aware of those shifts.
“The midstream universe has changed noticeably in recent years,” said Alerian in a recent research note. “MLPs represented 64% of the universe by market capitalization in 2015 but comprise 45% of the universe as of June 30, 2019. On the surface, this shift seems fairly drastic. However, if we look at the change in midstream MLP market cap, the decrease is only 13.3% from 2015 to today ($309 billion at the end of 2015 vs. $268 billion).”
A Good Time for the MPL space
With the Federal Reserve easing off interest rate hikes with a more patient stance and crude oil prices surging this year, it may be a good time to look at the MLP space.
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.
“In the past, access products that primarily invested in MLPs provided both yield and broad diversification in one product,” according to Alerian. “As a result of consolidations, MLPs are not as representative as they once were. Consequently, investors must choose what is most important to them when accessing the midstream space.”
Additionally, the midstream space is usually more defensive and less volatile than other energy segments due to steady, reliable cash flows.
“Many investors are using MLPs for income, and an access product that predominately owns MLPs is still the best option for maximizing tax-deferred income,” notes Alerian. “A RIC-compliant fund may be a better fit for investors primarily interested in total return (less focused on income) and broad exposure to the midstream space. As a word of caution, it’s important to make sure the other 75% in a RIC-compliant product provides the exposure investors want.”
For more information on master limited partnerships, visit our MLPs category.