Observing a chart of the Alerian MLP Index (AMZ) might well lead to the conclusion that the midstream sector must be facing significant headwinds. In fact, the index is currently trading within the range seen before the emergence of oil shale production—a period when midstream growth prospects were opaque for most operators. But we believe this perception of fundamental headwinds is incorrect.
In observing the sector's underlying business drivers, we believe midstream operators are set to benefit from several tailwinds rather than headwinds. Out of the extreme energy industry turbulence that reflected the cyclical break in oil prices that began in late 2014, a new normal appears to have emerged. In this new-normal environment, crude oil prices are likely to stay significantly below pre-break levels but U.S. shale producers appear capable of delivering moderate production growth nonetheless.
As such, we see midstream assets benefiting from a durable period of volume growth. Further, the massive, and expensive, buildout of pipelines and other infrastructure needed to accommodate the new shale production basins also appears to be moderating.
As a result, we believe many midstream operators sit in the enviable position of having the capacity to flow growing volumes through existing assets rather than needing to fund large new capacity additions. Therefore, as the energy markets continue to normalize, the midstream sector appears poised to offer visible business growth at attractive valuations.
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