The Alerian Energy Infrastructure ETF (ENFR) is positive proof that midstream energy is one of the places to be this year in the resurgent energy sector.

The exchange traded fund is higher by 25.525% year-to-date, an advantage of nearly 150 basis points over the S&P 500 Energy Index. Plus, there are reasons to believe midstream assets may have more upside ahead as 2021 enters its latter stages.

At the industry level, midstream was one of the bright spots during second quarter earnings, a trend that could potentially carry over to the current quarter and beyond.

“The midstream space delivered solid quarterly results as tailwinds from the recovering macro backdrop continued apace during 2Q21,” says Alerian analyst Maurico Samaniego. “Stronger trends across the commodity landscape led to a wave of “beat and raises” among midstream names, solidifying the near-term outlook as numerous management teams increased or maintained their guidance to incorporate stable or higher volume activity.”

Other ENFR Catalysts

Another source of potential good news, though longer-ranging, is midstream’s still-nascent foray into renewable energy – a transition that’s necessary for these operators as well purveyors of clean energy.

“Additionally, a string of new ESG-related initiatives announced by midstream names in July and August, coupled with recent favorable legislative developments, paved the way for continued progression on the ESG front, reassuring the secular outlook for midstream,” adds Samaniego.

As the Alerian analyst points out, there’s also momentum for midstream operators with significant gathering and processing businesses. Those names include Kinder Morgan (NYSE: KMI), Targa Resources (NYSE: TRGP), Hess Midstream LP (NYSE: HESM), and Equitrans Midstream Corp. (NYSE: ETRN), among others. That quartet combines for about 14% of ENFR’s lineup.

Perhaps one of the biggest sources of allure with midstream energy names today is the industry’s metamorphosis into a credible destination for investors looking for stout generators of free cash flow, which translates into elevated buybacks and steady dividends.

“In addition, HESM announced a $750 million unit repurchase from its sponsors, and while the dynamics of the buybacks differ from open-market buyback programs, the repurchases increase common ownership and deliver accretive benefits to common-unit holders,” notes Samaniego. “With the midstream space generating significant free cash flow, and in some cases excess free cash flow after distributions, buyback activity is likely to continue as some names execute buybacks more systematically while others continue to approach them opportunistically.”

Other funds with exposure to income-generating energy assets include the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (NYSEArca: MLPA).

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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.