The energy sector is on a roller coaster ride this year, one that’s taking energy infrastructure names and master limited partnerships (MLPs) along for that ride. However, midstream ideas, including some found in the Alerian Energy Infrastructure ETF (ENFR), can take some of the edge out of energy investing.
Midstream companies are levered to demand for export infrastructure, liquefied natural gas (LNG) demand, and wider differentials, among other factors. Data confirm midstream’s correlations to oil prices isn’t tight compared with other energy assets.
ENFR tracks the Alerian Midstream Energy Select Index (CME: AMEI). ENFR acts as a type of hybrid energy infrastructure ETF, which could help investors capture some of the high yields from MLPs but limits the tax hit from solely owning MLPs. Importantly, many midstream MLPs and energy infrastructure companies are working to deleverage their balance sheets.
“The recovery in energy has been multifaceted against the backdrop of an improving fundamental outlook for oil,” said Alerian analyst Michael Laitkep in a recent note. “For midstream, in particular, constructive company updates before and during 1Q20 earnings season and resilient distributions from larger names have likely supported performance. With the federal funds rate cut to zero in March, investors may also be attracted to midstream for income, which remains attractive despite recent distribution cuts. As of June 5, the AMZI was yielding 9.5%, off its high of 25.3% on March 18 but above its trailing three-year average of 8.6%. Similarly, the AMEI was yielding 7.1%, down from a high of 15.2% on March 18 but above the index’s three-year average of 6.4%.”
Midstream Matters Now
Midstream and MLP businesses are included in the ETF strategies because the segment is fundamentally related to the sector company businesses, can potentially increase yield generation, and are historically excluded from S&P 500 and Dow Jones Averages, providing another layer of diversification benefits.
Increasing the relevancy of midstream operators in today’s climate is their sturdy financial positions.
“Midstream companies entered 2020 in a better position financially to withstand macro volatility, and companies have taken further steps in recent months to improve positioning,” notes Laitkep.
Midstream firms are also dealing with leverage in fashion superior to many exploration and production outfits.
“Relative to their positioning in the oil downturn of 2014-16, many AMZI and AMEI constituents have managed leverage at more conservative levels,” writes Laitkep. “Relative to their positioning in the oil downturn of 2014-16, many AMZI and AMEI constituents have managed leverage at more conservative levels.”
Other MLP funds include the Global X MLP ETF (NYSEArca: MLPA) and the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ).
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
