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Decreasing MLP Leverage a Plus for This Midstream ETF

This article was originally published on ETFTrends.com.

The Alerian Energy Infrastructure ETF (ENFR) is outpacing the largest traditional energy exchange traded funds in significant fashion this year. Plus, the midstream-heavy ENFR yields over 5%. However, there are some other advantages to consider with this master limited partnership (MLP) fund.

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.

“After becoming overextended during the oil price downturn from 2014-2016, midstream companies have placed greater emphasis on reducing leverage to a more comfortable and sustainable level,” according to new research from Alerian. “Lower leverage provides increased flexibility to withstand challenging market environments and lays the foundation for companies being able to grow their dividend or buy back shares.”

ENFR A Win For Investors

MLPs earn money by transporting energy or storing the products. Since revenue is based on volume, MLPs may be less sensitive to crude prices. 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.

MLPs, including some ENFR components, are increasingly focusing on tidying up their balance sheets and investors win that scenario.

“With lessons learned from the oil downturn, management teams have reprioritized financial flexibility and balance sheet strength. Institutional investors (including generalists) are also increasingly focused on leverage,” according to Alerian.

Leverage ratios impact credit ratings and the ability to sustain and grow distributions.

“Furthermore, leverage ratios are an important determinant in credit ratings, which impacts cost of debt and project returns. It is important to note that ratings agencies and banks may have their own approach to calculating leverage,” notes Alerian.

For more information on master limited partnerships, visit our MLPs category.

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