The Alerian MLP Infrastructure Index (AMZI), the underlying index for the Alerian MLP ETF (AMLP), gained 7.74% in May on a total-return basis as solid 1Q22 earnings results and continued commodity price strength contributed to another month of outperformance for energy equities, eclipsing the S&P 500’s total return of 0.18% in May.
AMLP took in $97 million in net inflows in May, bringing the year-to-date tally up to $651 million in inflows. The fund has $6.9 billion in assets under management.
WTI oil prices extended their gains in May, ending the month with a 9.53% gain as prices settled at $115 per barrel. Natural gas prices at Henry Hub rose to multi-year highs and recorded a 12.43% gain for the month amid resilient liquefied natural gas (LNG) demand and tighter inventories, ALPS wrote in a recent monthly insight.
Gathering and processing names included in AMLP, which tend to be more sensitive to commodity prices, led the way in terms of performance with a 10.31% gain, while natural gas and petroleum transportation names rallied 6.46% and 7.00%, respectively, according to ALPS.
Energy equities, including midstream MLPs, have strongly outperformed the broader market thus far in 2022. Year-to-date through May 31, the AMZI has gained 28.01% on a total return basis, while the S&P 500 has fallen -12.76% on a total return basis, according to ALPS.
“The macro backdrop remains constructive for energy equities as they continue to benefit from higher commodity prices and continued inflationary pressures,” ALPS wrote. “Earnings season for energy infrastructure MLPs 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.”
In addition to returning more cash to shareholders, MLPs are also leveraging strong free cash flow generation to selectively pursue growth opportunities with attractive returns, particularly around natural gas and natural gas liquids.
Pipeline projects to address the growing need for additional natural gas takeaway from the Permian have been particularly in focus, according to ALPS. During the first week of May, MPLX (MPLX, 9.29% weight) confirmed the expansion of the Whistler Pipeline by 0.5 billion cubic feet per day (Bcf/d) to 2.5 Bcf/d with completion expected in September 2023.
MPLX and its partners EnLink Midstream (ENLC, 8.16% weight), WhiteWater (not a holding in AMLP), and Devon Energy Corp (not a holding in AMLP) announced that they would proceed with the construction of the Matterhorn Express pipeline, which will transport up to 2.5 Bcf/d of natural gas and is expected to be in service in 3Q24, ALPS wrote. Energy Transfer (ET, 10.84% weight) 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.
In its May Short Term Energy Outlook, the Energy Information Administration forecasts 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 MLPs, as it allows more volumes to flow through existing infrastructure and creates opportunities to add new infrastructure to grow fee-based cash flows, according to ALPS. Approximately 60% of the AMZI by weighting is primarily focused on activities related to natural gas — gathering and processing, natural gas pipeline transportation, and liquefaction.
For more news, information, and strategy, visit the Energy Infrastructure Channel.
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