As investors reenter the market in January after selling at year-end, midstream ETFs are worth consideration.
Clean energy ETFs were among the worst performers in 2023. After harvesting losses in clean energy, investors may look at midstream for a differentiated way to play the energy transition.
Clean energy and midstream have different investment characteristics, with midstream providing generous yields, largely generating free cash flow. Furthermore, the midstream segment performed well in 2023 given less interest rate sensitivity. While midstream and clean energy might seem like they don’t have much in common (making them an ideal pair for tax-loss harvesting), the energy transition is a key long-term opportunity for both segments.
Both renewables and fossil fuels will be necessary to satisfy future energy demand, as the projected increases in both population and energy consumption can’t be supported by renewables alone.
Companies operating in the midstream space include those involved in gathering and processing, liquefaction, pipeline transportation, rail terminaling, and storage.
How Midstream Companies Support the Energy Transition
Pipeline companies provide services that connect production to consumption of natural gas and crude oil. These companies serve as an example of how the midstream space will continue to be essential as the world transitions to a renewable energy future. The move to electrification will require more electricity than is currently being produced. While wind, solar, and hydrogen may play a part, natural gas will continue to play an essential role in generating more electricity.
Additionally, midstream companies support the use of renewable fuels and will play an important role in transporting captured carbon. Carbon capture, utilization, and sequestration (CCUS) is one of several clean energy technologies receiving significant government support due to the Inflation Reduction Act (IRA).
Midstream companies are playing key roles supporting CCUS projects, with more opportunities expected to materialize over time. Midstream names EnLink Midstream (ENLC), Enterprise Products Partners (EPD), and Western Midstream (WES) have struck partnerships to transport captured carbon for ExxonMobil (XOM) and Occidental (OXY).
ETFs Providing Exposure to Midstream Companies
AMLP’s underlying index is a capped, float-adjusted, cap-weighted composite of energy infrastructure MLPs. Included companies earn most of their cash flow from midstream activities.
ENFR’s underlying index is a composite of North American midstream energy infrastructure companies. The index includes MLPs (25%) and corporations (75%) engaged in the pipeline transportation, storage, and processing of energy commodities.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP and ENFR, for which it receives an index licensing fee. However, AMLP and ENFR are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP and ENFR.