MLPX: A Midstream Energy Fund That Generates Industry Beating Performance (NYSEARCA:MLPX)

~ by Snehasish Chaudhuri, MBA (Finance)

Global X MLP & Energy Infrastructure ETF (NYSEARCA:MLPX) is a midstream energy index exchange traded fund (ETF) that invests in comparatively safe and resilient energy companies, mostly in the United States. 20 percent of its investments are outside the US market. 80 percent of MLPX’s investments are non-fundamental, meaning those investments require 60 days prior written notice to shareholders before they can be changed. The fund generates industry-beating performance and stable yield around 5 to 7 percent. When the broader market is experiencing a bearish trend, MLPX has stood out in terms of return. MLPX was formed on August 6, 2013, and has since been paying steady quarterly dividends. For the past 36 quarters, in general, the fund has increased its pay-outs.

Global X MLP & Energy Infrastructure ETF is Less Sensitive to Energy Prices

Global X MLP & Energy Infrastructure ETF invests in stocks of companies and MLPs operating across energy pipelines and storage facilities, energy equipment and services, and oil and gas transportation sectors. These sectors historically have been less sensitive to energy price changes and resulted in above average yields. This midstream energy fund evades fund level taxes by limiting direct MLP exposure and investing its assets in General Partners of MLPs and other energy infrastructure corporations.

Global X MLP & Energy Infrastructure ETF has an asset under management (AUM) of $910 million, and an expense ratio of 0.45 percent. MLPX generated a growth of almost 8 percent and 10 percent over the past 3 years, and 1 year respectively. As we all know, since March 2020, the market has gone through turbulent times. Covid-19 pandemic, followed by Russia’s invasion of Ukraine has resulted in increasing energy and housing prices, rising unemployment, supply side shortages, and a record-high inflation. Thus, such a stable and strong return has made this fund attractive to investors.

MLPX’s Portfolio Performed Well and Generated Strong & Stable Returns

The fund fully replicates the composition of Solactive MLP & Energy Infrastructure Index. It consists of only 26 midstream energy stocks. Only 2 out of these 26 – TC Energy Corporation (TRP) and Equitrans Midstream Corp (ETRN) recorded negative price growth during this year. These two stocks constitute less than 12 percent of total holdings. On the other hand, there are stocks like Cheniere Energy, Inc. (LNG), and EnLink Midstream, LLC (ENLC), which grew by almost 70 percent during the past one year.

Another 11 stocks – Williams Companies, Inc. (WMB), Energy Transfer LP (ET), Targa Resources Corp. (TRGP), Enterprise Products Partners L.P. (EPD), MPLX LP (MPLX), Plains GP Holdings, L.P. (PAGP), Western Midstream Partners, LP (WES), Plains All American Pipeline, L.P. (PAA), Hess Midstream LP (HESM), DCP Midstream, LP (DCP), and Cheniere Energy Partners, L.P. (CQP) – grew in excess of 20 percent during the same period. Thus, overall, the component stocks outperformed the broader market. Backed by such strong performance of its portfolio, MLPX also did quite well. Year-to-Date (YTD) growth stood at 10.3 percent, while it grew by 10 percent during the past 1 year.

The Road Ahead for Midstream Energy Infrastructure Companies and MLPs

Globally, energy demand has picked up post covid-19 pandemic. Crude oil prices have climbed from less than $14 per barrel in April, 2020 to $92.6 at present, aided by supply cuts from major oil-producing countries and the expected increase in demand. The price almost reached $120 per barrel, some 8 months back, soon after Russia invaded Ukraine. The US oil and gas production has been gradually growing, and increased sanctions over Russian oil will increase its demand manyfold. Both increase in price and increase in production is helpful for the energy infrastructure companies and MLPs, as the demand for supply and logistics infrastructure shoots up.

Several of these energy infrastructure entities reported free cash flows in the past two years and going forward, as they leverage on the increasing energy demand and bring new projects online, will most likely generate higher distributable cash flows. A higher distributable cash flow will certainly be attractive to the shareholders, as they create more value for them, either in the form of dividend and share buy-back or in the form of reduction of leverage component of their balance sheet. Theoretically, these earnings and cash flows of midstream energy suppliers might decline if the energy demand weakens. But, in the short run, that seems unlikely. Moreover, the midstream energy infrastructure firms are less sensitive to changes in energy prices.

Investment Thesis

Due to the increasingly difficult political and regulatory environment, it is becoming difficult to approve and construct new interstate pipelines. The move towards clean and green energy has made building new infrastructure even more difficult. As a result, the existing energy supply network will become more valuable, and will be able to earn higher profits. Ongoing Russia-Ukraine conflict has proved that, no matter how the geopolitics is carried on, the world needs oil & gas. There are limited sources of these energies, North America has a lot of it in the ground, and midstream energy suppliers and infrastructure entities will continue to be useful for decades.

Global X MLP & Energy Infrastructure ETF is a great way to gain broad exposure to North American midstream energy infrastructure companies. This fund invests in midstream infrastructure entities such as pipelines and storage facilities that are less sensitive to energy prices. It generated strong growth over the short and medium term, when the broader market has failed to perform well. The fund has a reasonable expense ratio, and generates steady yield around 5 percent. Even after a strong few months of price growth since the covid-19 pandemic, MLPX still has the potential to grow. In my opinion, existing investors must hold this stock for a longer period, and should buy more units, whenever the price falls significantly.