While the prospect of interest rate cuts may induce some anxiety for fixed income investors, there are still yield opportunities available if they know where to look. One of those is within the midstream energy sector, or more specifically, the Alerian MLP ETF (AMLP).
Midstream companies can offer fixed income investors higher yields because of their ability to generate free cash flow. In a sector where energy prices stemming from various commodities like oil and gas can produce copious amounts of volatility, midstream companies can actually provide stable cash flow.
Additionally, when it comes to the yield of AMLP, it’s difficult to argue again the following numbers:
- Indicated yield (as of 02/09/2024): 8.13%
- Trailing 12-month yield (as of 02/09/2024): 9.74%
- 30-day SEC yield (as of 01/31/2024): 7.14%
- Unsubsidized 30-day SEC yield (as of 01/31/2024): 7.14%
AMLP seeks investment results that correspond to the Alerian MLP Infrastructure Index (AMZI). The index is a capped, float-adjusted, capitalization-weighted composite of energy infrastructure master limited partnerships that earn the majority of their cash flow from midstream activities.
Midstream Tailwinds Abound
Fixed income investors looking beyond yield will also want to know that income derived from midstream companies will be sustainable in the future. That said, the outlook for midstream companies is strong given a confluence of tailwinds in the subsector.
World Pipelines magazine is expecting oil and gas prices to neutralize in 2024 primarily due to excess supply. Nonetheless, increased energy exports should provide tailwinds, along with other factors affecting the industry.
“Consequently, we expect asset utilisation in the Sector to remain strong as rising energy exports drive up oil and gas production in North America,” World Pipelines noted. “Additional tailwinds include consolidation among oil and gas producers, which should improve counterparty risk profiles, stabilising interest rates and moderating inflation.”
Additionally, VettaFi’s Head of Energy Research Stacey Morris is expecting positive earnings results from midstream companies to pair alongside constructive outlooks for the year.
“Looking ahead, Morris expects the current earnings season to continue showing positive results and a constructive outlook for the year,” reported Yahoo Finance. “She anticipates modest EBITDA growth and a focus on returning excess cash to investors through buybacks and dividend growth. Overall, Morris remains very constructive on the midstream space for 2024, citing its ability to provide stable cash flows and attractive income amidst volatility in oil and gas prices.”
VettaFi LLC (“VettaFi”) is the index provider for AMLP, for which it receives an index licensing fee. However, AMLP 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 AMLP.
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