Midstream exposure is boosting the Alerian Energy Infrastructure ETF (ENFR ), making the exchange traded fund one of this year’s best-performing energy funds. ENFR’s exposure to Canadian midstream companies and master limited partnerships (MLPs) is proving efficacious.
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.
This year, production cuts have helped Western Canadian Sands (WCS) prices, but the region needs more pipelines to brings crude produced there to buyers throughout North America.
“Inadequate pipeline takeaway capacity has plagued Western Canadian oil producers for years, with more costly rail transportation often required to fill the gap,” said Alerian in a recent note. “The result has been widened discounts for Western Canadian Select (WCS) crude – the heavy sour oil benchmark priced in Alberta – relative to West Texas Intermediate (WTI), the light sweet crude priced at Cushing, Oklahoma.”
Canada’s Impact On ENFR ETF
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.
“Production limits have supported WCS prices this year, but additional pipeline takeaway capacity is the best long-term solution for improving crude prices in Western Canada,” according to Alerian. “Capacity additions have been challenging to say the least due to regulatory hurdles on both sides of the border. In addition to midstream companies working to add capacity, the US and Canadian governments as well as the provincial government in Alberta, have intervened.”
Canada is home to the world’s third-largest oil reserves, meaning it is potentially fertile for expansion by some of the companies featured on ENFR’s roster.
“Citing inefficient regulation and uncertainty surrounding additional transportation capacity, the Canadian Association of Petroleum Producers (CAPP) is forecasting annual oil production growth of 1.4% through 2035. While directionally positive, growth expectations have been tempered in recent years. CAPP had forecasted 4% average annual growth through 2030 back in 2014,” according to Alerian.
For more information on master limited partnerships, visit our MLPs category.