By Amey Stone
Investors who gave up on energy infrastructure after the master limited partnership sector crashed in 2020 have good reason to take another look. Not only do these businesses have less debt and stronger free cash flow, but demand for their services -- mostly operating pipelines and storage facilities for oil and natural gas -- is set to increase. The enormous energy needs of artificial intelligence are driving that demand, as are the effects of the Iran war.
"AI is top of mind," says Rob Thummel, senior portfolio manager at energy investment firm Tortoise Capital. "Increased energy exports is another theme. Countries around the world need a secure supply source."
Investors burned in the past by MLPs should recognize that "it's a totally different sector" now, says Thummel.
A brief history: The midstream sector, tied to the shale boom of the early 2000s, enjoyed fast growth as pipelines were built, but many companies took on too much debt. From 2014 to 2020, the sector focused on reducing debt and generating free cash flow. Companies trimmed payouts, and many of the MLPs converted to C corporations, which are more attractive to institutional investors. But share prices never fully recovered, and then hit a nadir during Covid when the economy tanked. The MLP index-tracking Alerian MLP exchange-traded fund went from a high of $96 in 2014 to a low of $18 in 2020.
"That [year] would have been a great time to buy," says Andrew Meleney, portfolio manager and head of research at Infrastructure Capital Advisors. The sector is up about 50% since 2020, with a 10% gain in the past year.
Meleney believes there are more gains ahead. He notes that the midstream sector has been less volatile than the S&P 500 index since the 2020 low and could support higher valuations. The sector's historical price-to-earnings ratio is 10 to 12, but he says it could climb as high as 14 to 15.
Demand from AI and overseas markets aren't the only positive catalysts, Meleney adds. Oil producers are increasing their rig counts, which means they will produce a greater volume of oil, which will need to travel through pipelines. Meanwhile, European demand for liquefied natural gas, which can be shipped across the ocean, will trigger increased use of pipelines to get unliquefied natural gas to LNG operators.
Another plus: An important part of the case for midstream is that the sector is considered less vulnerable to a decrease in energy prices, which could occur at the end of the Iran war. That is because MLP revenue typically comes from long-term contracts that are tied to volume, not the price of gas or oil.
"Midstream is not going to fall by 15% when crude falls," says Meleney. "You don't have to obsess about the war as you might if in other energy sectors," he says.
MLPs Versus C Corps?
Investors looking to benefit from the midstream sector can consider either MLPs or C corporations. An MLP is structured as a partnership, while almost all public companies are structured as C corporations. MLPs have some advantages over C corporations: They pay higher yields, have cheaper valuations, and offer significant tax benefits. As pass-through entities, these businesses aren't taxed at the corporate level and distribute high yields in the 5% to 7% range. (C corporation yields are more in the 3% to 5% range, Thummel estimates.) A big portion of MLP income may qualify as returned capital and thus is tax deferred. The catch is that MLPs generate K-1s instead of 1099s at tax time, and K-1s can be more difficult to deal with.
Picking individual midstream names can be complex for other reasons, too. Leading companies have different business models, and it is important to know where each one fits into the energy puzzle. Some of the most widely held MLPs are Energy Transfer, Enterprise Products Partners, and MPLX. Of the C corporations, the big names are Williams, Targa Resources, and Plains All American Pipeline.
Andrew Krei, chief investment officer at Crescent Grove, is a fan of midstream investing, but he thinks investors can't get enough diversification with just MLPs and should own C corporations as well. Clients of his firm use a separately managed account strategy to hold a diversified basket of midstream companies.
There are plenty of mutual funds, ETFs, and closed-end funds that invest in the midstream sector. They provide some diversification but don't always include both C corporations and MLPs. Funds with MLP in the name generally need to be 80% made up of MLPs and tend to be concentrated in just a few names. The top five constituents in Morningstar's MLP index represent 50% of the index's weight.
Tortoise Energy Infrastructure is a closed-end fund that owns both MLPs and C corporations. It has a yield of 13%, significantly higher than average, mainly because of the use of leverage. The firm recently launched the Tortoise MLP ETF, which provides exposure to MLPs but investors receive a 1099. The ETF has a 7% yield.
The Infracap MLP ETF yields 8%, according to Morningstar, and receives a yield boost from covered calls. "We wanted to offer something at the top of the category on yields while including some of the growth opportunity in natural gas names, which tend to yield less," says Meleney. The fund is up 21% this year but has a 10-year average annual return of 5%.
Like the energy infrastructure sector more broadly, the fund has a history of dramatic year-to-year swings but is shining right now.
Write to Amey Stone at amey.stone@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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June 05, 2026 03:30 ET (07:30 GMT)
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