Expect Midstream to Be Resilient Amid Rising Rates | ETF Trends

Unlike other sectors of energy, midstream companies provide services for a fee and often have contracts with inflation protection built into them, which has historically resulted in very stable cash flows for the space, even during periods of inflation and rising interest rates.

A key theme in the energy infrastructure space in 2021 was free cash flow generation. Midstream companies have been generating significant free cash flow above and beyond their dividend payments, opening the door for buyback programs, Alerian director of research Stacey Morris said last week on Nasdaq TradeTalks.

“If you look at our Alerian MLP Infrastructure Index, about 70% of the index by weighting has a buyback program in place, and that index is the underlying index for the Alerian MLP ETF (AMLP),” Morris said.

The same tailwinds around free cash flow and buybacks are continuing into 2022, Morris said.

Additionally, while energy infrastructure companies are providing services for a fee, commodity prices can impact sentiment in the space, thus the continued strength in energy markets has been favorable for the energy infrastructure space. 

“We saw a strong recovery in oil and natural gas prices last year in multi-year highs in the second half of 2021,” Morris said. “A lot of that strength has continued into 2022 and oil prices are up about 20% year to date.”

Morris said that past performance, coupled with the fact that midstream companies have done a lot in terms of reducing debt over the last couple of years with excess free cash flow, has encouraged expectations that the space will continue to be resilient, even in the midst of unfavorable economic climates.

Midstream has historically demonstrated strong performance during periods of inflation and rising interest rates, and has generally outperformed other sectors such as REITs and utilities. 

“If you look at performance over the last 20 years or so, in years where inflation has been higher than 3%, the midstream space has generally outperformed the broader market. The one exception was 2008,” Morris said.

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