The energy sector and midstream operators have endured their share of punishment this year, but could be bouncing back of late. Some analysts are optimistic about the midstream corner of the sector heading into 2021. That would be good news for the Alerian Energy Infrastructure ETF (ENFR).

The ALPS ETF 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 while limiting the tax hit from solely owning MLPs.

Stabilizing output and prices are among the factors that could help ENFR components extend recent bullishness in the new year.

“Fitch Ratings’ Improving Sector Outlook for North American midstream reflects the expected improvement in the overall operating environment relative to 2020 when Fitch had a Negative Sector Outlook. This view is set against the backdrop of expectations for stabilizing oil & gas production across the U.S. and Canada supported by marginally higher prices,” according to the research firm.

The ENFR ETF Setting Up Well for 2021

Midstream companies are exposed to demand for export infrastructure, liquefied natural gas (LNG) demand, and wider differentials, among other factors. Data confirm midstream’s correlation to oil prices isn’t tight compared with other energy assets.

MLPs don’t make their money off of oil or gas prices. Unlike other energy sector stocks, MLPs primarily deal with the distribution and storage of energy products, so the business model is less reliant on the commodities market as they profit from the quantity of oil and natural gas they can move around.

“Entering 2021, much of Fitch’s midstream portfolio has an improved liquidity position and a lighter maturity schedule, leaving those issuers better positioned (versus one year ago) should unexpected economic or severe commodity price weakness materialize,” said the ratings agency. “Furthermore, reduced capex budgets have improved cash flow profiles, and Fitch expects 2021 median FCF for midstream to be positive.”

A benefit of ENFR is that many of the worst-rated midstream names are smaller companies or those with ties to upstream producers, traits that aren’t broadly applicable to many ENFR components.

Other MLP funds include the Global X MLP ETF (NYSEArca: MLPA) and the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ).

ENFR YTD Performance

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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.