The energy sector has been trying investors’ patience for some time, but some market observers believe the group is poised to bounce back. Investors looking to capitalize on that resurgence may want to consider income-focused, lower risk ideas like the Alerian Energy Infrastructure ETF (ENFR).
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.
“The oil industry is starting to feel like the late 1990s again. That’s a good thing, according to Goldman Sachs analyst Michele Della Vigna,” reports Avi Salzman for Barron’s.
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.
ENFR to Recoup Losses?
A lot of sectors would like to put 2020 behind them. Energy has been one of them. Oil reached negative territory back in April, but brighter days could be ahead for energy.
The negative “trend will have to reverse for a rebound, Della Vigna argues. His bull case for oil involves less production but more profits per barrel. The 1990s was a good decade for oil profits, but not for employment. The industry lost nearly a quarter of its workforce in the 1990s, according to the Bureau of Labor Statistics. In the latest wave of mergers, companies have announced broad cost cuts that will likely involve layoffs,” according to Barron’s.
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.
“Investors and lenders have started to get more picky about giving money to oil-and-gas companies. While that will likely mean fewer projects get the green light in the years ahead, Della Vigna expects that the ones that do go forward will have much better economics. When capital is more scarce, companies choose only the best ones that have strong internal rates of return (IRR),” reports Barron’s.
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.
