On this episode of “What Makes That Ticker Tick,” VettaFi CMO Jon Fee spoke with Stacey Morris, head of Energy Research at VettaFi, to discuss the Alerian MLP Infrastructure Index (AMZI). The AMZI Index is the underlying index that currently powers two funds. The two funds that it powers are the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB).
AMZI Index
Jon Fee: Welcome back to What Makes That Ticker Tick. Today it’s all about AMZI, the Alerian MLP Infrastructure Index (AMZI), which is part of VettaFi’s indexing offering. Today, my guest is none other than Stacey Morris, CFA, head of research here at VettaFi. Stacey is live from Dallas, Texas. Tell us a little bit about yourself.
Stacey Morris: Yeah, thanks, Jon. Great to be with you. I’ve really spent my career in finance and oil and gas from doing south side equity research to doing investor relations for an oil refiner. And joined Alerian back in October 2017. So really enjoy the oil and gas space, and I’m excited to dig into it with you today.
What Is the Objective of the AMZI Index?
Jon Fee: So am I, and you definitely have the background for these 10 questions. Again, this is a show where we’d like to tackle 10 key questions about a particular index, one minute or less per question. Stacey, the question that I first asked you about yourself, you’re under a minute, so you’re the right person for this show. We’re going to cover index use cases, we’re going to cover index construction. We’re going to get into performance, and then my favorite part, we’re going to pop the hood and talk about specific stocks within the AMZI index. Question number one, Stacey, in one minute or less, what is the objective of AMZI?
Stacey Morris: Sure. So the Alerian MLP Infrastructure Index or AMZI is really providing an exposure to a subset of energy infrastructure MLPs. The index has criteria that generally result in a little higher quality, MLP exposure. This isn’t a broad MLP composite, so it’s energy infrastructure MLPs but with a little more tailored exposure.
What Is an MLP?
Jon Fee: Very cool. And what is an MLP? It’s an acronym you hear a lot in the energy space. What is it? What does it mean?
Stacey Morris: Sure. So MLP is a master limited partnership. The simplest answer is that an MLP is a pipeline company that gets special tax treatment. In reality, MLPs are passed through entities that don’t pay taxes at the federal level. They issue a K-1 to their investors that details the investors’ portion of the MLP’s earnings and losses and credits, deductions, et cetera. So they’re a little more involved than just special tax advantages. But the punchline for MLPs is that typically a significant portion of their dividends or distributions as we call them, are considered a tax-deferred return of capital. So what that means is a significant portion of their distributions. Typically, you don’t have to pay taxes on those until you sell out of your position. So that’s MLPs in a nutshell.
Special Tax Treatment From Natural Resources
Jon Fee: And is that because we’re talking about natural resources, that they get the special tax treatment?
Stacey Morris: That’s right. This was set up by an act of Congress in the 80s, but essentially you have to be handling or producing, or processing natural resources to receive this special treatment.
Jon Fee: Fantastic. Okay, staying on time. Question number three, also for index use case. Why have investors historically been attracted to MLPs? What’s the value proposition?
Stacey Morris: Sure. Front and center is income. MLPs typically play very attractive yields, and there’s a potential for tax-advantaged yield from MLPs as we talked about. MLPs are also used as an inflation hedge. They provide real asset exposure. They typically have long-term contracts with annual inflation adjustments. We also see MLPs used for more defensive energy exposure. Typically these companies are providing services for a fee, which is more stable cash flows. That’s not as sensitive to what’s happening with oil and gas prices. And then we also see it used for diversification. MLPs have low correlations with bonds and utilities, and you typically aren’t going to find MLPs in your broad market indexes. So people like MLPs because they generally don’t have exposure to them elsewhere in their portfolio.
Key Factors Used to Select Stocks for Inclusion Into the Index
Jon Fee: That’s a compelling value proposition for AMZI. Let’s move on to index construction. Question four, you have one minute to answer it. What are some of the factors used to select stocks for inclusion in the index?
Stacey Morris: Sure. So to be in the index, you have to be a publicly traded MLP or LLC. You have to pay a distribution or a dividend for the last two quarters. You have to meet a liquidity requirement, and then you have to primarily make your money from a midstream activity. In this index, most of these companies are categorized as pipeline transportation of petroleum or pipeline transportation of natural gas. We also have companies that are focused on gathering and processing, those work closer to the wellhead. And then you also have liquefaction, which involves taking natural gas and liquefying it for exports.
Jon Fee: Liquefaction sounds like something used to transport oil and gas over a longer distance, I’m assuming. Am I right?
Stacey Morris: Yeah, so natural gas is a lot easier to transport ownership when it’s liquified, it takes up a lot less space. So there are other activities that qualify for the index, but that’s where most of our constituents are focused.
The Index’s Rebalancing Strategy
Jon Fee: Fantastic. Question five, how often does the index get rebalanced or reconstituted?
Stacey Morris: Sure. It’s rebalanced and reconstituted every quarter in March, June, September, and December. And then I should also mention that it’s weighted based on float-adjusted market cap with a 12% cap for individual names.
How Has the Index Performed YTD and in the Long Term?
Jon Fee: Very cool. Moving on to performance measurements. Two-part question. I’d love to hear how the index has performed year to date. How is AMZI doing year to date, and then maybe over a longer term, like three years? How’s performance been then? So back to you, Stacey.
Stacey Morris: Yeah, sure. So year to date AMZI is at 19.5% on a total term basis. So [inaudible 00:05:43]outperforming the S&P 500, which is at 15% through October 10th, and definitely outperforming broader energy, which is around 4% year to date. And then if you look at three-year performance, it’s particularly strong because we’re comparing against September 2020. Things were still pretty challenging because of the pandemic. So the three-year annualized return is 44%, but again, keep in mind that it’s against a very low comp coming out of 2020.
AMZI’s Index Yield and Outlook for MLP Payouts
Jon Fee: Gotcha. Thank you. Okay, question seven, staying in the category of performance measurement, what is the current index yield and what’s your outlook for MLP payouts?
Stacey Morris: Sure. So the index is yielding 7.7% as of October 10th, and we feel really good about the outlook for MLP payouts. If you look at the index, about 80% of the constituents by waiting have grown their payouts within the last year. We haven’t seen a dividend cut from a name in this index since July 2021. So the dividend trends that we see in this space are really as strong as they’ve ever been. And a lot of that has to do with the fact that these companies are by and large generating significant free cash flow. So they’ve got a lot of extra cash on hand. They’re able to grow their dividends. Some of them are doing buybacks. So we feel really good about the outlook for the dividends from these companies.
What Market Environments Does the Index Perform Well In?
Jon Fee: Last question on performance, and you’re doing great knocking out all these questions, so thank you for that, Stacey. You mentioned nearly 20% outperformance this year. So tell us about the market environments where this index does perform well. What is it about 2023 that’s aiding in that performance? And then I’d love to hear maybe some of the less ideal market environments that could create some downward pressure on MLPs.
Stacey Morris: Yeah, so the index can work well in periods of high inflation. We’ve seen that in 2023, and really going back to 2021, I mean the index has outperformed the S&P 500 in 2021, 2022, and year to date. So high inflation environments can be helpful. A stronger energy backdrop can be helpful. Higher oil and grass prices tend to be positive for sentiment in this space. And then also this year we’ve seen a lot of M&A activity in the MLP space, which has helped performance as well. But in terms of what’s been more challenging environments, it’s really been focused around times when we’ve seen a significant pullback in oil prices. So during the pandemic in 2020, back in 2014, and the 2016 timeframe, those have been more challenging periods for this space.
How Do Companies in the Index Make Money?
Jon Fee: Okay, two more questions, and this is my favorite part of What Makes That Ticker Tick. It’s where you actually pop the hood on the index, in this case, AMZI. And we talk about specific stocks. So question nine, how do companies in the index make money? I mean, it’s midstream, so how do they make money?
Stacey Morris: Sure. So largely companies are providing services for a fee. They’re kind of the shipping and handling part of the energy value chain. So if you own a pipeline, you collect a fee for every barrel of crude or unit of natural gas that you move through your pipeline. Companies store hydrocarbons and collect fees, very similar to rent. Processing natural gas and natural gas liquids, generally, has become more and more fee-based. Sometimes there’s commodity price exposure in those contracts. We talked about liquefaction, you earn a fee for liquefying natural gas and putting it on a ship. Also earning a fee for loading exports like crude and propane or butane onto a ship. So there are a lot of different ways that companies in this space can make money, but generally, it’s all fee-based or mostly fee-based, and that provides more stable cash flows.
How Do Contracts Work?
Jon Fee: Stacey, you mentioned contracts. Are these typically annual contracts? Are they longer than that?
Stacey Morris: They’re typically long-term in nature. So for a pipeline, it could be 10, even 20 years. Storage contracts tend to be a little shorter, maybe three to five years. But generally speaking, they’re long-term contracts with annual inflation adjustments, and companies are very good about managing those contract expirations as well.
What Are Some of the Names of Companies Within the Index?
Jon Fee: Interesting. Okay, last question, and Stacey, you’ve done an incredible job, so thank you for joining us on What Makes That Ticker Tick. Your last question is what are some of the names of the companies included in the index? Give me two or three that I would find in AMZI.
Stacey Morris: Sure. So the biggest MLPs are in this index, Enterprise Products Partners, Energy Transfer, and MPLX. Those may be some of the names that you might see or you might not see just because MLPs are generally not as well known in the energy space. You don’t see a lot of signs for these types of companies in and around town, but they’re providing a critical function to our daily lives, and they’re probably touching hydrocarbons that we’re using in our day-to-day, and we just don’t realize it.
Will Stacey Morris be Attending Exchange?
Jon Fee: Very cool. Okay Stacey I’m going to sneak in one more question. Will I see you at Exchange in Miami Beach from February 11th through the 14th of next year?
Stacey Morris: I’m super excited about Exchange.
Jon Fee: So am I. The content is coming together. It’s great. It’s designed specifically for the financial advisor by financial advisors. We’re working with a lot of FAs across the US to figure out what’s the most important content for you in building your business. So please join us February 11th through the 14th down in Miami Beach at the Exchange Conference. Stacey, thank you again for joining me on What Makes That Ticker Tick. I will see you around the office.
Vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP and MLPB, for which it receives an index licensing fee. However, AMLP and MLPB are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP and MLPB.
For more news, information, and analysis, visit the Energy Infrastructure Channel.