With oil prices vaulting to highs that seemed almost unimaginable just a year ago, it can seem like the obvious play in energy investment would be to allocate funds there. Ongoing energy shortages in Europe and the inability of renewable energy to come online fast enough to meet energy demand all point to continued high prices for oil barrels and lots of growth in the short and long term. OPEC decided not to increase production a few days ago, all but ensuring a continued rally on oil prices.
But the Midstream has a lot to offer in this environment. Known for their incredible and consistent dividend yields, MLPs such as the ALPS Alerian MLP ETF (NYSEArca: AMLP) can provide investors with juicy returns.
How the Energy Space Works
Source: AiM
The midstream is essentially the infrastructure that handles the gathering, processing, transportation, and storage of hydrocarbons. This separates it from being directly beholden to the price of oil as MLPs have fee-based structures for their services. When demand is high, and lots of oil and natural gas needs to be moved or stored, the midstream flourishes.
Though not immune to economic uncertainty, the midstream can offer investors lots of income and exposure to energy without being beholden to the volatility that can come from the upstream. Oil might be creeping towards $100 a barrel, but that price was negative not long ago. Energy infrastructure companies tend to have assets in real estate that can hedge against inflation, and their tremendous cash flow positions them to have sound balance sheets and solid fundamentals.
Easier Sell For the ESG-Focused Investor
ESG-minded investors might find investing in oil directly hard to stomach, but the midstream has a number of technologies developing to contribute to a decarbonized world. Carbon capture, hydrogen-based fuel, and other environmentally friendly innovations promise to keep the midstream viable even as the world pivots to cleaner energy sources.
At an LDC Gas Forum, DT Midstream CEO David Slater said, “It’s clearly a societal priority for us to move to a lower-carbon economy. This journey isn’t a U.S. journey or a North American journey. This is a global journey.”
Aside from AMLP, investors can find exposure to the midstream in the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (MLPA).
For more news, information, and strategy, visit the Energy Infrastructure Channel.