The Outlook for Midstream Remains Constructive | ETF Trends

The macro backdrop remains constructive for energy equities as they continue to benefit from higher commodity prices and continued inflationary pressures, according to a recent insight from ALPS.

Earnings season for midstream companies wrapped up in early May, closing a strong reporting period characterized by numerous earnings before interest, taxes, depreciation, and amortization (EBITDA) beats, steady or upward guidance revisions, and increased return of capital in the form of dividend hikes and/or buybacks, ALPS wrote. In addition to returning more cash to shareholders, midstream companies are also leveraging strong free cash flow generation to selectively pursue growth opportunities with attractive returns, particularly around natural gas and natural gas liquids, supporting the potential for the industry to continue to deliver strong returns and value for investors.

One fund to consider for midstream exposure is the Alerian Energy Infrastructure ETF (ENFR), which provides exposure to the AMEI index, a composite of North American midstream energy infrastructure companies, including corporations and MLPs, engaged in the pipeline transportation, storage, and processing of energy commodities.

According to ALPS, pipeline projects aimed at addressing the growing need for additional natural gas takeaway from the Permian have been particularly in focus, including projects to help meet the growing demand for LNG exports. 

Kinder Morgan (KMI, 5.02% weight in ENFR as of May 31) is soliciting shipper interest for a 0.65 billion cubic feet per day (Bcf/d) expansion of the Permian Highway Pipeline and a 0.57 Bcf/d expansion of its Gulf Coast Express Pipeline, according to ALPS.

Enbridge (ENB CN, 9.48% weight in ENFR as of May 31) is advancing a series of projects to supply 1.5 Bcf/d to Venture Global’s Plaquemines LNG facility on the Gulf Coast, according to ALPS.

Energy Transfer (ET, 6.42% weight in ENFR as of May 31) has begun the regulatory process for a new natural gas pipeline from the Permian connecting into ET’s existing network south of Dallas-Fort Worth, according to ALPS.

In its May Short Term Energy Outlook, the Energy Information Administration forecasts that U.S. dry gas production will average 96.7 Bcf/d in 2022 (3.2 Bcf/d more than 2021 or + 3.40%) and grow to an average of 101.7 Bcf/d in 2023 (+5.17%). 

“Higher natural gas production bodes well for midstream companies as it allows more volumes to flow through existing infrastructure and creates opportunities to add new infrastructure to grow fee-based cash flows,” ALPS wrote. “Roughly 70% of the AMEI by weighting is primarily focused on activities related to natural gas – gathering & processing, natural gas pipeline transportation and liquefaction.”

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

vettafi.com is owned by VettaFi, which also owns the index provider for ENFR. VettaFi is not the sponsor of ENFR, but VettaFi’s affiliate receives an index licensing fee from the ETF sponsor.