Income-minded investors who are looking for ways to bolster their portfolios should consider master limited partnerships or MLPs-related exchange traded funds.
MLPs have been in a rout after a pullback in crude oil prices, especially over the month of November. Oil and MLPs were struck by a double whammy after an announcement of coordinated releases from the strategic national oil reserves and the spread of the new COVID-19 Omicron variant.
However, supply restraint from U.S. oil producers and coordinated production cuts among the Organization of Petroleum Exporting Countries and its allies, or OPEC+, have been a strong support in bolstering oil prices, which has helped MLPs in 2021. Consequently, MLPs remain one of the best-performing assets of the year.
Some have been worried that the increased emphasis on sustainability or climate change would negatively affect heavy polluting industries like the energy sector. However, MLPs can still adapt to the changing market environment ahead.
“We believe investor concern over ESG (environmental, social, and governance) issues and the group’s ability to adapt to the accelerating transition away from fossil fuels are likely headwinds. Yet, the group appears ready to embrace changes to improve in this area. We expect additional MLP announcements to address current ESG shortcomings. We believe MLPs have made tremendous strides in improving business models, reducing leverage, and embracing capital discipline,” Wells Fargo Investment Institute analysts write in their latest Asset Allocation Strategy 2022 Outlook research note.
Moreover, after years of distribution cuts, MLP payouts appear more sustainable with many in the space generating positive free cash flow.
Investors can also turn to MLPs and the midstream energy space as an attractive yield play, especially with the current low interest rate environment and the group’s relatively high yield.
“We believe high-quality midstream MLPs should benefit from the above-mentioned improvements as well as reasonable valuations and the continued economic recovery,” according to Wells Fargo.
Moreover, Wells Fargo analysts expressed belief that the midstream space is better positioned than the broader energy sector.
“We expect recent measures taken by midstream c-corporations and MLPs to improve balance sheets and reduce leverage — along with the steadier nature of cash flows — to help them attract investors better than some of their energy-sector peers,” according to Wells Fargo.
To keep tabs on the master limited partnerships and midstream energy space, investors can look to related ETF strategies, such as the ALPS Alerian MLP ETF (NYSEArca: AMLP), the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), the Alerian Energy Infrastructure ETF (ENFR), the ETRACS Alerian Midstream Energy High Dividend Index ETN (AMND), the ETRACS Alerian Midstream Energy Total Return Index ETN (NYSEArca: AMTR), the ETRACS Alerian MLP Index ETN Series B (NYSE: AMUB), the ETRACS Alerian MLP Infrastructure Index ETN (MLPB), the ETRACS Alerian Midstream Energy Index ETN (NYSEArca: AMNA), and the ETRACS NYSE Pickens Core Midstream Index ETN (NYSEArca: PYPE). Energy infrastructure or midstream energy companies are engaged in the transportation, storage, and processing of natural resources, typically fossil fuels. These companies follow more fee-based business models that benefit from the transportation, processing, and storage of energy in the U.S.
For more news, information, and strategy, visit the Energy Infrastructure Channel.