The Alerian Energy Infrastructure ETF (ENFR) has recently been steady and that could be a sing of positive things to come for midstream energy assets, particularly if the economy continues rebounding from the impact of the coronavirus.
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.
Midstream companies are exposed 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. However, midstream energy names were challenged earlier this year.
“Midstream’s challenges have been myriad. Oil prices’ drop from over $100 a barrel in mid-2014 dispelled the myth the sector was immune from volatility in energy prices,” reports Forbes. “That lesson has been rammed home again this year, as oil and gas producers have cut production and pressured midstream volumes.”
Demand Matters
The energy market has fundamentally changed. The collapse of oil demand in the wake of the coronavirus pandemic has sent oil prices plummeting, and markets simply don’t know how to price the future. But this does not impact all energy companies in the same way.
“The world hasn’t stopped using oil and natural gas, and pipelines are still the safest and most efficient way to get energy to businesses and consumers,” according to Forbes. “Even with Covid-19 depressed demand, a cutback in associated gas from reduced oil output and an unprecedented build out of renewable energy, the US still produced 33 percent more natural gas in March 2020 than it did in January 2017. And by 2025, the U.S. Energy Information Administration’s middle case estimate is we’ll produce 8 percent more oil and 9 percent more gas.”
MLPs don’t make their money based on oil or gas prices. Unlike other energy sector stocks, MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they can move around.
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.
