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MLP ETFs Riding High: Can the Rally Sustain?

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It seems that the coronavirus blues of the energy sector are slowly passing away. The coronavirus-led global slowdown weighed on oil demand at the start of this year following lockdowns but back-to-back vaccine news boosted the global markets in November as well as brightened the demand outlook of the energy sector.United States Oil Fund LP (USO - Free Report) has gained about 16.2% past month (as of Dec 4, 2020).

The jump in oil prices came despite the rising virus cases in Europe and the United States, surge in Libyan oil production, and the likelihood of the Biden administration lifting U.S. sanctions on Iran oil exports. Even a rise in U.S. oil output (as an impact of the 40% jump in oil rig count from the mid-August lows) could not retard the oil price rally last month.

OPEC’s decision to increase production in a phased or gradual manner has boosted oil prices. The group will now raise output by 500,000 barrels per day starting January though it had cut output by nearly 8 million barrels per day this year to fight the pandemic.

Among the various corners of the energy space, MLP companies have displayed particular strength in recent weeks. Infracap MLP ETF (AMZA - Free Report) was up as high as 12.1%. The fund has added 55.4% past month. Let’s find out what drove the space higher and if the rally will continue.

Inside the Upbeat Drivers

Fitch Ratings expects the operating environment for the North American midstream sector to improve in 2021, thanks to recovering U.S. and Canadian oil & gas production helped by marginally higher prices. If this was not enough, lower capex budgets have boosted cash flow profiles and Fitch expects 2021 median FCF for midstream to be positive.

Entering 2021, much of Fitch’s midstream portfolio will enjoy better liquidity and “a lighter maturity schedule, leaving those issuers better prepared (versus one year ago) for any unexpected economic or severe commodity price weakness.” These factors ensure a more predictable midstream payout.

The major refining and marketing midstream players — being largely insulated to fluctuations in commodity prices — have managed to maintain their distribution levels thus far, by prudent cash management.

We believe that the rally is likely to continue ahead on the back of vaccine hopes.  Moreover, investors may want to tap the high-yielding products like MLPs in the current low-rate environment. This investing trend is likely to stay strong as long as no further oil demand concerns crop up.

Against this backdrop, investors can bet on the following MLP ETFs.

InfraCap MLP ETF (AMZA - Free Report)

The InfraCap MLP ETF seeks total return primarily through investments in equity securities of publicly traded master limited partnerships and limited liability companies taxed as partnerships. The fund charges 241 bps in fees annually and yields 19.65% annually.

Alerian MLP ETF (AMLP - Free Report)

The underlying Alerian MLP Infrastructure Index is a capitalization-weighted composite of energy infrastructure Master Limited Partnerships that earn the majority of their cash flow from the transportation, storage, and processing of energy commodities. The fund charges 87 bps in fees and yields 11.15% annually.

Global X MLP ETF (MLPA - Free Report)

The underlying Solactive MLP Infrastructure Index tracks the price movements in shares of companies that are structured as MLP and are engaged in own and operate assets used in energy logistics, including, but not limited to, pipelines, storage facilities and other assets used in transporting, storing, gathering, and processing natural gas, natural gas liquids, crude oil or refined products. It charges 46 bps in fees and yields 12.60% annually.

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