The floodgates of spending by big oil companies are likely to remain closed this year even if crude prices rally and that could actually be a positive for midstream assets, including 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 helps investors capture some of the high yields from MLPs while limiting the tax hit from solely owning MLPs.
In prior eras of high oil prices, energy companies, including midstream assets, spent too quickly, taking on too much debt. However, balance sheets are now top priorities in the midstream space.
“Oil and natural gas prices will average within our medium-term ranges in 2021 as markets keep rebalancing amid an uneven global economic recovery,” according to Moody’s Investors Service. “Sharply diverging growth trajectories between Asia and the US and Europe, and across different industries, will extend an uneven recovery in demand, keeping oil and gas prices volatile and sensitive to changes in supply. A continued recovery in global oil demand depends in part on effective pandemic management around the world.”
Make Cash Call with ENFR
Investors can look to the midstream and the ENFR for more compelling cash flow-generating prospects. Free cash flow is the cash a company has left over after accounting for capital spending and it’s a vital evaluation metric in capital-intensive industries, such as energy. Fortunately, the outlook on this front is bright for midstream names.
Master limited partnerships and midstream companies have been reducing leverage as of late, but what are the benefits of this move? Midstream companies are involved in the gathering, processing, storage, and transportation of oil and gas.
Additionally, the midstream space is usually more defensive and less volatile than other energy segments due to steady, reliable cash flows.
“Cuts in operating costs have helped support midstream EBITDA amid modestly improved upstream business conditions. However, even achieving flat EBITDA could pose a challenge for the sector. Midstream companies are also dramatically cutting capital budgets in an effort to generate positive free cash flow. A number of midstream companies have already cut dividends and unitholder distributions, freeing resources for debt reduction and improving balance sheets,” according to Moody’s.
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).
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.
