7 Ways to Invest in Midstream Oil and Gas Companies
Midstream companies can increase diversification.
Investors often overlook the midstream sector. This sector is less affected by commodity prices because its revenue is derived from long term, fee-based contracts and is "inherently less risky than pure exploration and production companies," says Jay Hatfield, CEO of Infrastructure Capital Management. Companies operate pipelines that transfer oil and gas from the producers of raw materials to the refiners which convert it into usable products, says Kostya Etus, a portfolio manager of CLS Investments. These companies are typically structured as master limited partnerships, known as MLPs, and offer tax benefits due to their pass-through earnings on to end investors, generating an attractive yield. Here are seven midstream stocks and exchange-traded funds to add to a portfolio.
Global X MLP & Energy Infrastructure ETF (ticker: MLPX)
This energy ETF gives investors access to MLPs and invests in midstream infrastructure entities such as pipelines and storage facilities that have less sensitivity to energy prices. MLPX generated a three-year annualized return of 3.1% compared to its index, which returned 3.8%. MLPX's expense ratio is relatively low at 0.4%, and its top holdings include Kinder Morgan (KMI) and Enbridge (ENB). The fund holds a maximum of 25% of its assets in MLPs, while the remainder of the portfolio is invested in energy infrastructure corporations, says Kostya Etus, a portfolio manager of CLS Investments. "While it offers a diluted exposure to the MLP industry, which decreases the distribution yield, fees will appear to be lower due to favorable tax treatment and a higher pass-through rate."
Enterprise Products Partners (EPD)
Enterprise Products Partners is a Houston-based natural gas and crude oil pipeline midstream company. The dividend yield is about 6% with a 52-week range of $23.33 to $30.87. High-quality energy infrastructure or midstream companies like Enterprise Products Partners, Magellan Midstream Partners (MMP) and Williams Companies (WMB) offer dividend yields of at least 6%, says Rob Thummel, a portfolio manager at Tortoise Capital. "Many investors choose REITs and utilities when looking for income," he says. But energy infrastructure securities can offer investor yields that are almost double those of REITs and utilities. "The U.S. has the largest energy infrastructure network in the world," he adds.
Magellan Midstream Partners (MMP)
Magellan Midstream Partners is another energy infrastructure company that investors should consider, Thummel says. The Tulsa, Oklahoma-based company provides a dividend yield of 6% and its 52-week range is $54.25 to $72.90. Magellan reported second-quarter net income of $253.7 million. Midstream companies collect fees for performing services based on the amount of volume handled, says Stacey Morris, director of research at Alerian. These businesses tend to be more defensive than other energy subsectors. Compared to exploration and production companies, midstream companies pay more attractive yields, and they have a lower correlation with oil prices, she says. Exploration and production companies, known as E&Ps, have more direct exposure to commodity prices than midstream companies, she adds.
Williams Companies (WMB)
Williams Companies is a provider of large-scale infrastructure for natural gas products. Thummel recommends the Tulsa, Oklahoma-based company, which generates a dividend yield of about 6%. WMB's 52-week range is $20.36 to $32.22. Investors can include companies such as Williams and Oneok (OKE), Bright says. "There are differences among these companies which investors should research carefully," he says. "Some have a national focus on huge pipeline assets. Others are more local and focused on gathering and storage. "There is no best way to invest in the midstream business since there are pros and cons to each strategy, Bright says. "Buying an individual stock is the highest risk, highest reward approach," he says.
Tortoise North American Pipeline Fund (TPYP)
The Tortoise MLP & Pipeline Fund tracks the companies in the Tortoise North American Pipeline Index and is a market capitalization-weighted index of pipeline companies headquartered in the U.S. and Canada. The top holdings include Oneok, TC Energy (TRP) and Kinder Morgan, and the fund generates a dividend yield of 4.1%. The expense ratio is 0.4%, but the fund has a generous year-to-date return of nearly 16%, while its one-year total return is about 7% and its three-return return is around 6.5%. "Tortoise Energy is a company focusing on infrastructure and it has a variety of approaches to investing in the industry through closed-end funds," Bright says.
Alerian MLP ETF (AMLP)
The Alerian MLP ETF is the largest and most-liquid MLP ETF, Etus says. "[It] may be one of the best representations of MLP industry returns," he says. The expense ratio is 0.85%, and the generated a one-year return of 4.5%, with a dividend of around 8%. But Thummel says the maximum weights in the ETF are too high which can add greater risk to returns. AMLP weights at least 10% of its holding in Magellan Midstream Partners, Enterprise Product Partners and Plains All American Pipeline (PAA). The companies with the most opportunities to take advantage of the U.S. becoming a net exporter of oil and other products are Enterprise Product Partners, Energy Transfer (ET), Phillips 66 Partners (PSXP) and Plains, Hatfield says.
InfraCap MLP ETF (AMZA)
The InfraCap MLP ETF is a more complex and actively managed fund. The fund managers employ leverage, shorting and options strategies to enhance income and manage risk, Etus says. It pays out a monthly distribution, whereas most other MLP ETFs pay quarterly, which may be favored for investors dependent on investment distributions, he says. "The most unique thing about this fund is it typically has a 12-month distribution yield of about 20%, significantly more than competitors," Etus says. "The yield comes from both dividends and capital gains and such a high yield does not come without additional risks." The year-to-date performance is 18.7%. The ETF has a dividend yield of 20.5% and a higher expense ratio of 2.4%.
How to invest in midstream oil and gas companies:
-- Global X MLP & Energy Infrastructure ETF (MLPX)
-- Enterprise Products Partners (EPD)
-- Magellan Midstream Partners (MMP)
-- Williams Companies (WMB)
-- Tortoise North American Pipeline Fund (TPYP)
-- Alerian MLP ETF (AMLP)
-- InfraCap MLP ETF (AMZA)
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