The midstream sector is emerging as a powerful tool for both income and stability in portfolios. During a recent panel at Exchange, Stacey Morris, head of energy research at VettaFi, and Paul Baiocchi, head of fund strategy at SS&C ALPS Advisors, discussed how the evolution of midstream energy — moving, storing, and processing hydrocarbons — is creating a unique opportunity for yield-hungry portfolios.
Unlike upstream producers that are sensitive to crude prices, midstream companies operate on a fee-based model. This “shipping and handling” function provides a buffer against commodity swings. Morris noted that these companies provide services for a fee, often through long-term contracts with built-in inflation adjustments.
“With a fee-based business model, you’re getting much more stable cash flows than in other sectors of energy,” Morris explained. “These are companies that can provide EBITDA guidance for the year ahead. You don’t get that upstream or downstream because too much depends on what’s happening with commodity prices”.
It’s important to recognize that the segment’s growth is no longer focused on oil demand. Natural gas demand in the U.S. is expected to grow by 39 billion cubic feet per day by 2035, driven largely by a doubling of liquefied natural gas (LNG) export capacity and the massive power requirements of AI data centers. Morris highlighted that this demand-driven growth leads to higher-value pipeline projects with longer contract terms.
The Yield Opportunity in Midstream
Midstream continues to offer some of the most attractive yields in the equity universe. The underlying index for the Alerian MLP ETF (AMLP ) is currently yielding approximately 7%, while the index for the Alerian Energy Infrastructure ETF (ENFR ) yields roughly 4.7%.
For advisors, energy infrastructure acts as a potent diversifier. With a correlation to the S&P 500 that has dropped from 0.5 to approximately 0.21 over the last few years, it offers a distinct building block for portfolios dominated by the Magnificent Seven.
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