Master limited partnerships and energy infrastructure sector-related exchange traded funds are great investment tools that investors should have in their kits.
For starters, energy infrastructure companies are an attractive source of income in a yield-starved environment. These companies generate steady cash flows as fee-based businesses, and MLPs are able to pay out more of their cash flows as distributions since they are not taxed at the entity level.
“With interest rates near historical lows, yield has become scarce for income-seeking investors. Energy infrastructure offers greater income than other yield-oriented investments such as bonds, utilities, and Real Estate Investment Trusts (REITs). Current yields for the AMZI and AMEI are attractive relative to other income opportunities, and importantly, MLPs provide the potential for tax-deferred income,” according to Alerian.
The energy infrastructure sector also leverages a macro recovery and provides exposure to global energy’s future prospects. The energy rally that started in fall 2020 has maintained its momentum through 2021 with both oil and natural gas prices now at multi-year highs. Meanwhile, midstream energy companies have also capitalized on the rally, providing leverage to both the global energy recovery and an energy transition.
Alerian also argued that fundamental improvements could also provide a tailwind to the energy infrastructure sector. For example, energy infrastructure companies are generating free cash flow in 2021 due to stable cash flows and reductions to growth capital spending plans. Additionally, some companies have buyback authorizations in place — Alerian pointed out that eight AMZI constituents and 16 AMEI constituents, or 69% and 59% of each index by weighting as of the end of September, have buyback plans.
Additionally, the companies are also trying to keep up with the times.
“In order to create more sustainable businesses, midstream firms are combining their focus on financial flexibility with research into alternative and renewable energy business opportunities. Energy infrastructure MLPs and corporations have responded to growing investor focus on sustainability issues by improving transparency and widely adopting ESG reporting,” according to Alerian.
For more news, information, and strategy, visit the Energy Infrastructure Channel.