For Energy Sector Investors, MLP ETFs Can Offer High-Yield Payouts
Investing.com | Oct 07, 2021 19:58
Investors in energy stocks often pay close attention to Master Limited Partnerships (MLPs), a partnership structure typically preferred by oil and gas companies.
Research led by Haiwei Chen of the University of Alaska Fairbanks, School of Management states :
“An MLP has one general partner (GP) and many limited partners (LPs)… By law, MLPs have to pay out at least 90% of the free cash flow (FCF) to all partners.”
In other words, as MLPs typically have high distribution (or dividend) yields, passive income seekers keep their shares on their watchlist. Most MLPs make distributions quarterly.
However, financial services company Charles Schwab reminds investors:
“While MLPs can help provide investors with higher income payments than many other investment alternatives, they also come with higher risks and more complexity.”
Among those risks cited by Schwab are complex tax consequences, interest rate risk, volatility risk and legislation risk.
Furthermore, interested readers should understand how an investment in an MLP stock or an exchange-traded fund (ETF) that focuses on MLPs could fit in their long-term portfolios. With that information, here are two ETFs for today.
h2 1. Global X MLP ETF/h2Current Price: $35.90
52-Week Range: $21.21 - $41.54
Distribution Yield: 9.01%
Expense Ratio: 0.46% per year
The Global X MLP ETF (NYSE:MLPA) invests in some of the largest, most liquid midstream MLPs worldwide, which focus on the storage, transportation, and processing of oil and natural gas. They typically collect fees for transporting their customers' oil and other energy commodities.
Therefore, when we discuss midstream MLPs, investors need to know what types of contracts MLPs might have with their clients. These could include fee-based, keep whole or percent of proceeds agreements. Given the volatile nature of energy commodities, contract quality becomes critical in assessing the stability of cash flows.
MLPA, which has 20 holdings, tracks the Solactive MLP Infrastructure Index. The fund began trading in April 2012. The top 10 names make up about 70% of net assets of $1.04 billion.
In terms of sectors, we see traditional storage and transportation of petroleum (48.25%) followed by gathering and processing (28.25%) and storage and transportation of natural gas (23.50%).
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Leading holdings include Enterprise Products Partners (NYSE:EPD), Energy Transfer (NYSE:ET), Magellan Midstream Partners (NYSE:MMP), MPLX (NYSE:MPLX) and Plains All American Pipeline (NASDAQ:PAA). Many of the large holdings in the roster reported strong metrics in the second quarter, with growing earnings, robust cash flows and decreasing debt levels.
The fund returned 60.9% in the past year and 31.8% in 2021. MLPA hit a multi-year high in June. Entering a stock or a fund at elevated levels typically comes with short-term risks. A potential decline toward $35 or below would, therefore, improve the margin of safety.
h2 2. USCF Midstream Energy Income Fund/h2Current Price: $29.80
52-Week Range: $24.32 - $31.50
Distribution Yield: 3.74%
Expense Ratio: 0.85 per year
The USCF Midstream Energy Income Fund (NYSE:UMI) gives access to US and Canadian mid-stream energy companies, including MLPs. The fund started trading in March 2021 and net assets stand around $105 billion.
UMI, which has 22 holdings, is an actively managed fund. Among the metrics used to evaluate these energy names are income growth, balance sheet strength, contract quality, distribution coverage (or whether these companies can afford their distributions), and direct-commodity price exposure. This last metric measures how moves in commodity prices can influence share prices, especially in the short run.
Targa Resources (NYSE:TRGP), Enbridge (NYSE:ENB), Enterprise Products Partners (NYSE:EPD), Cheniere Energy (NYSE:LNG) and TC Energy (NYSE:TRP) are among the top names in the roster. The leading 10 names make up about 65% of net assets.
Since inception in March, the fund is up about 20% and saw a record high of $31.50 in mid-June. Interested investors could consider investing around $28.5.
Robust MLPs with quality contracts as well as solid fundamental metrics are cash cows that investors love. We believe both funds deserve to be on your radar screen in Q4.
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