Rising oil prices buoyed the energy sector in the first quarter despite falling natural gas prices. Midstream Master Limited Partnerships (MLPs) remained resilient to natural gas declines and energy sector volatility in Q1, offering reliable income for investors.
A milder-than-expected winter resulted in above-average natural gas winter storage surpluses. Natural gas prices declined 29.87% in the first quarter on weak demand and subsequent oversupply.
Midstream MLPs are responsible for storing, processing, and transporting natural gas and oil. Their business structure is a fee-based one, providing less exposure to commodity price volatility and drawdowns. This means they offer defensively positioned exposure within the energy sector. For income investors, this can prove a boon when oil or gas prices fall.
The Alerian MLP ETF (AMLP) rose 13.66% (NAV) in the first quarter. Meanwhile, the Alerian Energy Infrastructure ETF (ENFR) gained 11.88% (NAV) in the first quarter.
Gathering and processing as well as natural gas transportation are arguably the most directly exposed midstream subsectors to natural gas.
In the first quarter, these subsectors within the Alerian MLP Infrastructure Index (AMZI), the underlying index for AMLP, rose substantially. Gathering and processing gained 19.51% in Q1 on a total returns basis. Natural gas transportation rose 14.72% on a total returns basis over the same period.
The Alerian Midstream Energy Select Index (AMEI), the underlying index for ENFR, demonstrated similar subsector performance in Q1. Gathering and processing rose 17.90% on a total returns basis while natural gas transportation climbed 12.27%.
See also: “VettaFi’s Head of Energy Research Provides Insight on the Leading MLP Index“
Electricity, Natural Gas Demand to Increase Over Summer Months
The U.S. Energy Information Administration forecasts a hotter summer this year compared to 2023. The EIA expects a 4% gain in residential energy consumption this year, mostly in the summer months.
Last year, natural gas accounted for 43.1% of all electricity generated in the U.S., the EIA reported. This equated to 1.8 trillion kilowatt-hours (kWh) of the 4.18 trillion kWh generated at utility-scale power plants in 2023. Greater summer electricity demand will likely create greater natural gas demand in the coming months.
Image source: EIA
Noteworthy Yields, Diversified Exposure
Investors looking for opportunities within the energy sector with an eye to income would do well to consider AMLP and ENFR.
The Alerian MLP ETF (AMLP) seeks to track the performance of the Alerian MLP Infrastructure Index (AMZI). The index contains MLPs that derive most of their cash flow from midstream.
The Alerian Energy Infrastructure ETF (ENFR) seeks to track the performance of the Alerian Midstream Energy Select Index (AMEI). The index contains MLP and energy infrastructure companies within North America.
The fee-based MLP business models prove beneficial for cash flow when gas or oil prices fluctuate. This creates notable yields for investors.
- AMLP currently has an indicated yield of 7.42% as of 04/24/2024. Indicated yield takes the most recent dividend and annualizes it before dividing it by the current share price, and is forward-looking. The fund has a trailing 12-month yield of 7.27% as of the same period. AMLP carries an expense ratio of 0.85%.
- ENFR currently has an indicated yield of 5.37% and a trailing 12-month yield of 5.06% as of 04/24/2024. ENFR carries an expense ratio of 0.35%.
AMZI is the underlying index for the Alerian MLP ETF (AMLP). AMEI is the underlying index for the Alerian Energy Infrastructure ETF (ENFR).
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.
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