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Midstream ETF Could be the Way to Play Latest Oil Shock

This article was originally published on ETFTrends.com.

Oil prices spiked Monday after a drone strike crippled Saudi Arabian oil assets, taking 5% of global daily supply offline. However, oil's upside was mostly confined to one day as headlines broke Tuesday that the kingdom will be able to restore most of that lost supply sooner than expected, news that sent crude prices lower.

For investors looking to get into the energy patch while reducing some of the volatility associated with instruments that are more correlated to crude prices, the Alerian Energy Infrastructure ETF (ENFR) makes some sense due to its midstream exposure.

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. The fund tracks the Alerian Midstream Energy Select Index (AMEI).

“Our long-term outlook for midstream oil and gas companies is unchanged, but we could change our fair value estimates depending on whether new and material investment projects are sanctioned in response,” said Morningstar in a recent note.

The Primary Deal For MLPs

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.

“We think midstream companies that could benefit from higher demand for export infrastructure and related pipelines, wider differentials, and higher demand for liquefied natural gas, given oil-linked contracts,” according to Morningstar.

Related: The Midstream Matters With This MLP ETF 

Additionally, the midstream space is usually more defensive and less volatile than other energy segments due to steady, reliable cash flows.

“We see the increase in oil prices since the attack as a modest response for a disruption of this magnitude, suggesting that the market expects a quick resolution. We think the situation remains fluid and sensitive, with heightened tensions in the Middle East and potential reprisals from Saudi Arabia,” according to Morningstar.

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

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