Second-quarter earnings season is drawing to a close and it’s fair to say the Alerian Energy Infrastructure ETF (ENFR) dealt with reports from midstream energy names fairly, gaining almost 2% over the past 90 days.
In fact, most midstream companies, including plenty of ENFR components, didn’t materially alter second-quarter or full year guidance for the worse.
“Fitch Ratings believes it is a testament to the defensive nature of the midstream sector that the 2Q20 earnings season featured only trivial guidance revisions toward the negative,” according to the ratings agency.
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 looking to bolster their renewables exposure.
Looking Ahead
Supporting a near-term bullish view on ENFR is “green shoots” commentary from some midstream and pipeline operators in recent weeks.
“Buckeye Partners, L.P. (BB/Stable) reached a milestone in mid-July when partial operations commenced at South Texas Gateway (STG) and the first marine vessel was loaded with crude oil. The deep-water crude export terminal is located in Ingleside, Texas at the mouth of the Corpus Christi Ship Channel. STG is a joint venture under construction that will be operated by Buckeye, which has a 50% ownership stake,” according to Fitch.
Income-minded investors may find pockets of opportunity in the energy segment through infrastructure-focused Master Limited Partnerships (MLPs) and corporations that generate robust yields. Unlike oil producers and services companies, energy infrastructure companies provide real business-line diversification in the energy sector, as they deal with the transportation, storage, and processing of energy, which are far less reliant on commodity prices.
Moreover, midstream assets have some of the stronger balance sheets in the energy patch and ENFR haven’t been rampantly slashing dividends as some traditional energy names have.
For investors looking to get into the energy patch while reducing some of the volatility associated with instruments that are more correlated to crude price, ENFR makes some sense due to its midstream exposure.
Additionally, the midstream space is usually more defensive and less volatile than other energy segments due to steady, reliable cash flows.
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.
