Entering this year, the energy sector was widely viewed as a value destination. Following a rally in oil prices and related equities, some market observers say the sector isn’t as inexpensive as it once was.
However, there are still some bargains to be had in the group. Investors wanting those good deals may want to evaluate the midstream and assets such as the Alerian Energy Infrastructure ETF (ENFR).
In fact, the Alerian Midstream Energy Select Index (AMEI) – ENFR’s underlying index – is trading at multiples that are attractive relative to historical norms.
“As of last Friday, the Alerian MLP Infrastructure Index (AMZI) and the Alerian Midstream Energy Select Index (AMEI) were trading at a significant discount relative to both their historical average and current valuations across the utilities sector and the broad market,” writes Alerian analyst Mauricio Samaniego.
AMZI is the underlying index ENFR’s stablemate, the ALPS Alerian MLP ETF (NYSEArca: AMLP).
Good Deals with ENFR
According to Alerian data, ENFR’s index currently trades at 9.8x earnings, compared to a 10-year average of 12.1x. Conversely, both the utilities sectors and the S&P 500 are richly valued relative to decade averages. Additionally, investors are also getting above-average yields with ENFR without having to incur rich valuations.
“Discounted valuations complement midstream’ s attractive income amid an expensive market where yield is becoming more scarce,” according to Samaniego. “While the midstream space has become more focused on total return by self-funding equity capital and enhancing financial flexibility to reduce debt, it continues to offer attractive income in a market where yields continue their downward slide (10-year treasury yields hit a new five-month low last week). As seen in the chart below, the AMZI and AMEI are yielding significantly above other income-oriented assets.”
Something else for investors to ponder regarding ENFR is midstream operators’ increasing emphasis on balance sheet strength, asset quality, and shareholder rewards – traits the group is offering up at a discount.
“Discounted valuations complement midstream’ s attractive income amid an expensive market where yield is becoming more scarce,” concludes Samaniego. “While the midstream space has become more focused on total return by self-funding equity capital and enhancing financial flexibility to reduce debt, it continues to offer attractive income in a market where yields continue their downward slide (10-year treasury yields hit a new five-month low last week). As seen in the chart below, the AMZI and AMEI are yielding significantly above other income-oriented assets.”
Other funds with exposure to income-generating energy assets include the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (NYSEArca: MLPA).
For more on cornerstone strategies, visit our Energy Infrastructure 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.