The provided strong returns last year, coupled with an attractive yield.
ENFR’s underlying index, the Alerian Midstream Energy Select Index (AMEI), gained 19.15% on a total-return basis in 2022, marking the second consecutive year of outperformance over the S&P 500, which declined -18.11% during the year.
AMEI lagged broader energy and other subsectors more sensitive to commodity prices, which benefitted from higher commodity prices last year. Midstream’s fee-based business model supported by long-term contracts limits the impact of commodity prices on cash flows, insulating the segment from plunging prices, as seen in 2020, or the impact of a potential recession.
As of the end of December, AMEI’s yield was 6.28% (53 basis points below its three-year average) and the index was trading at a discount to its 3-year average forward EV/EBITDA multiple.
Equity repurchases remained a utilized tool for returning capital to investors in 2022, with 74.03% of AMEI by weighting having a buyback program in place as of year-end.
The tailwinds benefitting midstream companies over the last two years, including strong free cash flow generation, should continue in 2023 regardless of oil and natural gas prices. With excess cash flow, AMEI constituents will likely continue to prioritize dividend increases and equity repurchases, according to Stacey Morris, head of energy research at VettaFi.
Recession concerns and the related impact on energy demand are still relevant; however, with many crosscurrents in energy markets, a recession may not be as painful for commodity prices as in the past. Canadian names, which represented 26.74% of AMEI by weighting at year-end, tend to be particularly defensive in challenging markets, according to Morris.
Energy infrastructure companies remain well positioned for ongoing inflation given real asset exposure and annual inflation adjustments typically included in contracts. Despite an uncertain macro outlook, the positive momentum for energy infrastructure may continue through 2023 as company-level tailwinds are expected to remain intact, added Stacey Morris.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
vettafi.com owned by VettaFi, which also owns the index provider for ENFR. VettaFi is not the sponsor of ENFR, but VettaFi’s affiliate receives an index licensing fee from the ETF sponsor.