Midstream, MLP ETFs Could Benefit From the Improving Natural Gas Market

Rising natural gas prices and the potential for increased production among energy companies trying to capitalize on the more lucrative pricing could help master limited partnerships and related exchange traded funds.

“While the near-term improvement in natural gas fundamentals is positive, the constructive long-term outlook for production and demand in the US and expectations for global demand growth also bode well for midstream in the coming years,” according to Alerian.

As natural prices improve, there are increased expectations for natural gas production. In its September Short-Term Energy Outlook, the US Energy Information Administration projected marketed natural gas production of 102.7 billion cubic feet per day for 2022, or an increase of more than 2.5 Bcf/d (+2.6%) since its previous May 2021 estimates.

The EIA is projecting annual production growth of about 4% for 2022, and it even expects production to surpass pre-pandemic highs from December 2019 of 104.2 Bcf/d by August 2022 and to even hit 106.1 Bcf/d by the end of 2022.

“As volume-driven businesses, the expected recovery in natural gas production bodes well for midstream,” according to Alerian. “Midstream companies are key players in the natural gas value chain through their involvement in gathering and processing, as well as transporting natural gas and natural gas liquids (NGLs).”

Specifically, raw natural gas is transferred by pipeline and moved to a processing facility where it is then purified and NGLs are separated, which are further processed at fractionation facilities. Alerian pointed out that some midstream companies are directly involved in LNG and NGL exports as well.

“While some investors may think of midstream companies as primarily operating oil pipelines, many names generate the majority of their cash flows from assets focused on natural gas,” according to Alerian.

“With fundamentals improving, many midstream corporations and MLPs with assets servicing natural gas and NGLs increased their 2021 EBITDA guidance or pointed to the high-end of their full-year guidance range on 2Q21 earnings calls (read more),” Alerian added.

To keep tabs on the master limited partnerships and midstream energy space, investors can look to related ETF strategies, such as the ALPS Alerian MLP ETF (NYSEArca: AMLP), the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), the Alerian Energy Infrastructure ETF (ENFR), and the ETRACS Alerian Midstream Energy Index ETN (NYSEArca: AMNA).

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