Market Overview

Another Reason To Like This MLP ETF

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Another Reason To Like This MLP ETF

The Alerian Energy Infrastructure ETF (NYSEA:ENFR) has been receiving increased attention this year and with good reason as a variety of factors have sent the master limited partnership exchange traded fund to a year-to-date gain of 20.2%.

What Happened

Among other factors, ENFR and its components have been boosted by strength in the midstream MLP space, those companies shoring up their balance sheets and increased domestic oil production. Investors may want to consider consolidation as another potential tailwind for ENFR.

Just four years ago, MLPs represented 64% of the midstream space, but that number is now 45%, according to Alerian research.

“On the surface, this shift seems fairly drastic,” said Alerian in a recent note. “However, if we look at the change in midstream MLP market cap, the decrease is only 13.3% from 2015 to today ($309 billion at the end of 2015 vs. $268 billion).”

Why It's Important

About two-thirds of ENFR's holdings are oil and gas pipeline operators, a potentially alluring segment of the energy patch for acquisitive companies because those companies are heavily focused on the U.S. and oil production is at all-time highs.

At the end of the second quarter, the 38 components in ENFR's underlying index had an average market value of $13.9 billion, basically mid-cap territory and approachable for several larger, well-heeled energy companies looking for midstream assets. Currently, MLPs account for just over 60% of the domestic midstream market.

“With fewer midstream MLPs, it becomes more difficult for MLP products focused on midstream to differentiate themselves from a security selection standpoint,” said Alerian. “There are only so many large, investable midstream MLPs from which to choose.”

In other words, as the midstream universe shrinks, that shrinkage likely favors index-based, passive strategies like ENFR because there may not be enough investable companies in the space for active managers.

What's Next

The recent initial public offering of Rattler Midstream (NASDAQ: RTLR) could set the stage for midstream IPOs, thereby leading to an increase in population for this corner of the MLP market.

“The positive reception to RTLR may pave the way for additional midstream IPOs, whether structured as MLPs or corporations,” according to Alerian. “Bloomberg reported in late June that privately-owned Blue Racer Midstream was considering an IPO, though details were scant. Given significant private equity (PE) involvement in midstream, PE firms may pursue an IPO as a potential exit if the equity markets for midstream remain constructive.”

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