Income Opportunities and Outlook for Energy Infrastructure in 2022

In a recent webcast, Tom Lydon, CEO of ETF Trends, was joined by Stacey Morris, director of research for Alerian and S-Network Global Indexes, and Danny Schwab, senior investment strategy advisor for SS&C ALPs, to discuss energy infrastructure now and going forward. Topics discussed include macro and microeconomic tailwinds for energy infrastructure, dividends and the free cash flow that companies within the industry are experiencing, rising energy prices and the global crunch on the energy supply, and how energy companies are participating in the renewable energy transition.

Last year was a solid year for commodities, with oil and gas reaching multi-year highs, Morris explains. Midstream overall had a strong year of performance, with some weaknesses seen around the timing of different COVID variants, but overall the sector ended the year up 41% on a total return basis.

Midstream and energy both typically perform well in inflationary times and are positioned positively at the beginning of 2022. Many contracts for companies within the space contain inflation adjustments, and so inflation can be seen as a tailwind for EI for the year. Additionally, yields within midstream continue to be attractive for investors because they are currently above their 10-year average.

“I think that it’s worth noting that midstream is currently trading below its historical average valuation,” explains Schwab. “You have high yields, you have good valuations, and if you go back to the beginning of… 2021, and then through the first couple weeks of 2022 here, energy is the top performing segment in the market.”

Morris sees dividend growth in midstream, which was steady in 2021, continuing to gain strength and traction in 2022 due to better balance sheet positions for companies, an excess of free cash flow, and normalizing yields equating to better dividends. Free cash flow in particular is a major component of midstream companies and performance in 2021; surpluses in cash flow have allowed 70% of companies within the AMZI and AMEI indexes to have buyback authorizations in place.

Pivoting to address the growing focus on ESG and the role that midstream might have as energy use transitions to renewable sources and low-carbon emissions, Morris believes that EI will play a pivotal part.

“I think what’s important for people to understand is that midstream assets have a role to play in the energy transition. The ability to move and safely store energy is going to be an asset for years to come,” Morris says, going on to explain that pipelines might be used for alternative sources in the future, such as captured carbon dioxide or hydrogen, and that midstream could be an important part in the transition.

Investing in Midstream

ALPS and Alerian offer two ETFs within midstream, the Alerian MLP ETF (AMLP), which is comprised entirely of MLPs, and the Alerian Energy Infrastructure ETF (ENFR), which invests more broadly and has a 25% allocation to MLPs and a 75% allocation to C-corps. They are different plays within the midstream sector, with AMLP offering a focus on higher yields and ENFR offering a focus on total return, Schwab explains.

In an environment of low yields and rising interest rates, fixed income has become a challenging segment of portfolios. Investors are looking to alternative solutions, and AMLP, ENFR, and midstream overall are attractive areas to pivot to, particularly because they aren’t correlated to bonds.

“I think what we’ve seen, with midstream in particular, is it’s a unique sector of the commodities market because these are well-positioned companies in a time when infrastructure is very, very important,” Schwab says.

The webcast closes with an extensive Q&A section that discusses the correlation of oil and midstream, growth opportunities in midstream, the liquidity of ENFR and AMLP and how they trade, and other topics.

For more news, information, and strategy, visit the Energy Infrastructure Channel.