The Alerian Energy Infrastructure ETF (ENFR) provides exposure to the Alerian Midstream Energy Select Index (AMEI). The index is a composite of North American energy infrastructure companies, including C-corps and MLPs. Midstream companies transport, process, and store hydrocarbons, a crucial role that generates predictable fee-based revenue.
ENFR provides exposure to five midstream sectors: pipeline transportation of natural gas, pipeline transportation of petroleum, gathering and processing, liquefaction, and storage.
Transportation
Pipeline transportation of natural gas makes up 40.5% of ENFR by weight as of December 18. Meanwhile, pipeline transportation of petroleum comprises 22.1% of ENFR by weight as of December 18.
Pipelines play a large role in ENFR, as they are the cornerstone of energy infrastructure. Transportation names move energy commodities, such as oil and natural gas. Most energy travels through a pipeline in North America, but it can also move via truck, railcar, or ship.
Transportation is a fee-based business model, lending to stable cash flows. Midstream companies will typically enter long-term contracts with customers committing to use a certain amount of pipeline capacity. The midstream company will collect a fee per unit of hydrocarbon transported.
Importantly, contract provisions such as take-or-pay agreements or minimum volume commitments allow the pipeline company to collect specified fees even if agreed volumes are not shipped.
For new-build projects, the length and terms of these contracts allow the pipeline company to earn the rate of return necessary to construct the pipeline. This means that transportation companies have historically avoided building speculative projects.
Gathering and Processing
Additionally, Gathering and processing makes up 28.7% of ENFR by weight as of December 18.
Gathering pipelines collect oil and natural gas from wells and transport them to aggregation points. Processing transforms a raw commodity into a usable form. This includes removing impurities like water and dirt from wellhead natural gas as well as separating the natural gas stream into pipeline-quality natural gas and natural gas liquids (NGLs).
Mixed NGLs are further processed into purity products like propane and butane. Gathering and processing also includes water services for hydrocarbon production.
Liquefaction
These operations make up 6.0% of ENFR by weight as of December 18. Liquefaction refers to cooling natural gas and transforming it into a liquid state, so it can be shipped overseas for export. U.S. Companies typically earn a fixed fee for liquefaction under long-term sales contracts that span 20 years. LNG exports have increased in recent years as export capacity has increased and new projects have come online.
Storage
Finally, storage makes up 2.4% of ENFR by weight as of December 18.
Storage includes tanks, wells, and other facilities both above and below ground. Natural gas that is not immediately required for electricity generation or heating is stored until needed. The same is true of crude oil waiting to be refined, and of refined products waiting to be consumed.
Storage facilities operate a fee-based business model, with contract lengths generally ranging from one to five years.
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VettaFi LLC (“VettaFi”) is the index provider for ENFR, for which it receives an index licensing fee. However, ENFR is 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 ENFR.