Investors familiar energy infrastructure assets and master limited partnerships (MLPs) no that there’s a long-running debate about which structure is better: C-corp (traditional corporation) or MLP?
With the Alerian Energy Infrastructure ETF (NYSEArca: ENFR), investors don’t have to make the call on C-corps or MLPs because the ETF features exposure to both structures.
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 working to deleverage their balance sheets.
Recently, there has been activity on the C-corp acquiring MLP front.
“Based on recent history, a midstream C-Corp parent acquiring a majority-owned midstream MLP comes as a little surprise, though the transaction may have happened sooner than expected given it had not been a topic of conversation on recent earnings calls,” according to a new note from Alerian. “Additionally, as announced in December, Tallgrass Energy (TGE) agreed to be acquired by Blackstone Infrastructure Partners, with the transaction expected to close in 2Q20. Blackstone indicated earlier this month that it plans to comply with its obligations outlined in the merger documents. While not a consolidation, Hess Midstream (HESM) completed its conversion to an Up-C structure in December.”
Fundamentally Related
Midstream and MLP businesses are included in the ETF strategies because the segment is fundamentally related to the sector company businesses, can potentially increase yield generation and are historically excluded from S&P 500 and Dow Jones Averages, providing another layer of diversification benefits.
“For larger MLPs, a recurring question around structure and the potential of converting to a C-Corp persists,” notes Alerian. “As discussed in the past, a common misconception is that MLPs are converting to corporations, but primarily, corporations have been consolidating MLPs, or conversion has coincided with other simplifications like IDR eliminations or mergers.”
MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.
ENFR yields 10.69%.
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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.