The Middle East war has caused oil prices to rise because it puts the Israel/Saudi peace agreement on hold, which would have resulted in Saudi Arabia increasing production by 1MM barrels per day. In addition, there is a risk that Iran will enter the conflict, which could put its 3MM barrels of daily production at risk.
Our estimate for the price that balances supply/demand in 2023 is $85 and $95 next year if the Saudis do not raise production. Our supply/demand forecast does include a slow increase in US production to 13.5MM barrels/day. The XOM/PXD merger will only affect US production in the long run with minimal impact on 2024 US production.
Bullish Outlook
This bullish outlook on oil prices is an attractive operating environment for Midstream MLPs/Pipelines. Specifically, higher oil prices will likely result in steadily growing production which translates to growing volumes on oil and product pipelines.
In addition, global natural gas prices are primarily driven by oil prices as they are direct substitutes in many processes. The US is the dominant producer of natural gas and has an 80% cost advantage relative to the rest of the world. This arbitrage is driving a rapid increase in LNG exports, which creates attractive growth opportunities for midstream pipeline companies. In addition, over the last 5 years, the midstream sector has transformed itself in response to energy price volatility and limited access to equity capital markets.
Midstream Transformed
Over the past few years, midstream companies successfully transitioned to having positive free cash flow, sustainable dividends, and reasonable leverage levels. Earnings, which historically were low in the MLP space, are now substantially positive and companies trade at reasonable price-to-earnings ratios of less than 12x. Additionally, debt to EBITDA, a measure of leverage, has fallen from an average of 4.5x to 3.6x.
We expect these developments to generate durable earnings and consistent distribution growth in the midstream energy space.
Natural Gas
Natural gas continues to be an affordable heating and power-generating option for the world. Europe is transitioning away from Russian gas, and we expect U.S. gas production and LNG exports to play a pivotal role in growing supply.
U.S. natural gas production has grown by 10.8% over the past two years (as of 9/30/2023), driven primarily by the Permian growing by 4 Bcf/d. Over the same period, LNG exports have grown by 23% and are a necessary outlet for U.S. gas production. Importantly, natural gas has less than half of the carbon intensity as that of coal. U.S. coal usage is down more than 50% from its peak. Treating natural gas as its replacement implies a 27% reduction in utility-scale carbon emissions.
Distribution Coverage Ratios
Traditionally, midstream distribution coverage ratios had been ~1.1x and companies relied on outside financing for growth capital. Coverage ratios are now above 2.0x and companies are raising their distributions.
Distribution and dividend growth
After a significant decrease in oil prices and a halving of the rig count in 2015, Midstream dividends fell by more than 40%. Midstream dividends are now growing at a modest past since repairing balance sheets and right sizing the dividends.
Equity Issuance
Midstream has traditionally been net equity issuers. Paying out all available cash and financing new projects with a combination of debt and equity. Midstream has now transitioned to net share repurchases.
Lower leverage
After peaking in 2019, Midstream debt/EBITA ratios have fallen to historic norms.
Free Cash Flow Generation
For more than three years midstream is well above their available cash from operations, therefore requiring outside financing in the form of debt or equity. This proved unsustainable and ignoring the covid era between 2015-2020, distributions fell by more than 40%.
Click on any chart or table to below to enlarge for better reading.
Opinions represented above are subject to change and should not be considered investment advice. *All calculations on the ‘Comparable ETFs’ index are an arithmetic mean calculation across applicable funds in the index. Many of the statements in this file reflect our subjective belief. If you have any questions, please reach out to Craig Starr at Craig.Starr@icmllc.com or 212-763-8336. Additional disclosure information for Craig Starr and ICA can be found here: https://bit.ly/ica-disclosure.
*All calculations on the ‘Comparable ETFs’ index are an arithmetic mean calculation across applicable funds in the index. Opinions represented above are subject to change and should not be considered investment advice.
ABOUT INFRASTRUCTURE CAPITAL ADVISORS
Infrastructure Capital Advisors, LLC (ICA) is an SEC-registered investment advisor that manages exchange-traded funds (ETFs) and a series of hedge funds. The firm was formed in 2012 and is based in New York City. ICA seeks current income opportunities as a primary objective in most, but not all, of ICA's investing activities.
DISCLAIMER
The information contained herein represents our subjective belief and should not be construed as investment advice. Infrastructure Capital Advisors, LLC may have a long or short position in one of these securities at the time of writing this blog or after the article is published. The opinions expressed are the opinions of Infrastructure Capital Advisors, LLC, and do not express a portfolio management decision to buy or sell a security or endorse a buy or sell decision. The information and opinions provided should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding any investments mentioned, and their prospects based on such investors’ own review of publicly available information and should not rely on the information contained herein. Infrastructure Capital Advisors, LLC nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein. This article is not an offer to sell, or solicitation of an offer to buy any investment product or services offered by Infrastructure Capital Advisors, LLC, (“ICA”) or its affiliates. ICA, will only conduct such solicitation of an offer to buy any investment product or service offered by ICA, if at all, by (1) purported definitive documentation (which will include disclosures relating to investment objective, policies, risk factors, fees, tax implications and relevant qualifications), (2) to qualified participants, if applicable, and (3) only in those jurisdictions where permitted by law. This article includes information based on data and calculations sourced from Bloomberg and index constituents in the Alerian MLP Index and the Alerian MLP ETF that tracks such index. We believe that the data is reliable, we have not sought, nor have we received, permission from any third party to include their information in this article. Many of the statements in this article reflect our subjective beliefs. Opinions represented above are subject to change and should not be considered investment advice. Past performance is not indicative of future results. The links to the fund fact sheets will provide standardized performance and risk disclosures. The indicated yield data and distribution history data are obtained from Bloomberg. Please reach out to us for more information about the underlying data.
FUND RISKS
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus with this and other information about the Fund, please click here. Please read the prospectus carefully before investing.
ICAP Exchange Traded Funds (ETF): Investing involves risk, including possible loss of principal. An investment in the Fund may be subject to risks which include, among others, investing in equities securities, dividend-paying securities, utilities, small-, mid-and large-capitalization companies, real estate investment trusts, master limited partnerships, foreign investments, and emerging, debt securities, depositary receipts, market events, operational, high portfolio turnover, trading issues, active management, fund shares trading, premium/discount risk and liquidity of fund shares, which may make these investments volatile in price. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small and Medium-capitalization companies, foreign investments, and high-yielding equity and debt securities may be subject to elevated risks. The Fund is a recently organized investment company with limited operating history. Please see the prospectus for a discussion of risks. Distributor, Quasar Distributors, LLC
PFFR: Exchange-Traded Funds (ETF): The value of an ETF may be more volatile than the underlying portfolio of securities it is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. Preferred Stocks: Preferred stocks may decline in price, fail to pay dividends, or be illiquid. Real Estate Investments: The Fund may be negatively affected by factors specific to the real estate market, including interest rates, leverage, property, and management. Industry/Sector Concentration: A Fund that focuses its investments in a particular industry or sector will be more sensitive to conditions that affect that industry or sector than a non-concentrated Fund. Passive Strategy/Index Risk: A passive investment strategy seeking to track the performance of the underlying index may result in the Fund holding securities regardless of market conditions or their current or projected performance. This could cause the Fund’s returns to be lower than if the Fund employed an active strategy. Correlation to Index: The performance of the Fund and its index may vary somewhat due to factors such as Fund flows, transaction costs, and timing differences associated with additions to and deletions from its index. Market Volatility: Securities in the Fund may go up or down in response to the prospects of individual companies and general economic conditions. Price changes may be short or long term. Prospectus: For additional information on risks, please see the Fund’s prospectus.
PFFA: Exchange Traded Funds: The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. Preferred Stock: Preferred stocks may decline in price, fail to pay dividends, or be illiquid. Non-Diversified: The Fund is non-diversified and may be more susceptible to factors negatively impacting its holdings to the extent that each security represents a larger portion of the Fund’s assets. Short Sales: The Fund may engage in short sales, and may experience a loss if the price of a borrowed security increases before the date on which the Fund replaces the security. Leverage: When a Fund leverages its portfolio, the value of its shares may be more volatile and all other risks may be compounded. Derivatives: Investments in derivatives such as futures, options, forwards, and swaps may increase volatility or cause a loss greater than the principal investment. No Guarantee: There is no guarantee that the portfolio will meet its objective. Prospectus: For additional information on risks, please see the Fund’s prospectus.
AMZA: Exchange Traded Funds: The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. MLP Interest Rates: As yield-based investments, MLPs carry interest rate risk and may underperform in rising interest rate environments. Additionally, when investors have heightened fears about the economy, the risk spread between MLPs and competing investment options can widen, which may have an adverse effect on the stock price of MLPs. Rising interest rates may increase the potential cost of MLPs financing projects or cost of operations, and may affect the demand for MLP investments, either of which may result in lower performance by or distributions from the Fund’s MLP investments. Industry/Sector Concentration: A fund that focuses its investments in a particular industry or sector will be more sensitive to conditions that affect that industry or sector than a non-concentrated fund. Short Sales: The Fund may engage in short sales, and may experience a loss if the price of a borrowed security increases before the date on which the Fund replaces the security. Leverage: When a Fund leverages its portfolio, the value of its shares may be more volatile and all other risks may be compounded. Derivatives: Investments in derivatives such as futures, options, forwards, and swaps may increase volatility or cause a loss greater than the principal investment. MLPs: Investments in Master Limited Partnerships may be adversely impacted by tax law changes, regulation, or factors affecting underlying assets. No Guarantee: There is no guarantee that the portfolio will meet its objective.
You should consider each Fund’s investment objectives, risks, charges, and expenses carefully before investing. For ICAP, contact Quasar Distributors, LLC or visit the ICAP website at www.infracapequityincomefundetf.com for access to prospectus, fact sheet, distribution schedule and more. For AMZA, PFFA, and PFFR, contact VP Distributors LLC at 1-888-383-4184 or visit www.virtusetfs.com to obtain a prospectus that contains this and other information about the Fund. The prospectus should be read carefully before investing. Virtus ETF Advisers, LLC serves as the investment advisor, and Infrastructure Capital Advisors, LLC serves as the subadviser to the funds PFFA, AMZA, and PFFR. PFFA, AMZA, and PFFR are distributed by VP Distributors, LLC, member FINRA, and a subsidiary of Virtus Investment Partners, Inc.
Past performance is not indicative of future results. The links to the fund fact sheets will provide standardized performance and risk disclosures.
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