The InfraCap MLP ETF (NYSEARCA:AMZA) holds some of the top midstream companies in North America in its portfolio, who are all benefitting from the shale renaissance currently sweeping the globe.
However, the holdings of AMZA continue to suffer even in the face of overflowing pipelines and strong demand for new pipelines, which is putting a damper on the fund's performance. To go one step further, E&Ps cannot expand production until more takeaway capacity comes online in 2019.
Since a major bulk of the long-awaited pipelines have finally come online, or will at some point in 2019, E&Ps can now enter into manufacturing mode, which will produce more oil & gas volumes for the holdings in AMZA to transport and process.
Consequently, I continue to stay long AMZA and expect the large monthly distributions to pay me while I wait for sentiment in the midstream space to turn a corner in 2019.
As I alluded to above, AMZA seeks to:
Provide a high level of current income, a growing income stream, and long-term capital appreciation. The fund is an actively managed portfolio of high-quality, midstream energy master limited partnerships (MLPs) and related general partners, utilizing options strategies and modest leverage.
The fund also has an expense ratio of 1.93, which is considered higher than average. However, even with its high expense ratio, the dividend is still one of the largest in the sector. Plus, I expect capital gains from stock appreciation in AMZA to offset its expense ratio over time.
Here are the fund's top holdings:
As investors can see, the top 5 holdings of AMZA represent more than half of the fund. So, we will break down EQT Midstream (EQM), MPLX LP (MPLX), and Energy Transfer (ET) for starters, who all reported impressive third quarter earnings in 2018.
AMZA Top Holdings Have Multiple Future Growth Projects To Sustain Payouts
The top holdings of AMZA have a plethora of backlog work to grow earnings and sustain dividend payouts into the foreseeable future. MPLX, for example, already has new pipelines in service that are adding to cash flows.
But the company also has Swordfish, Whistler, and the PGC pipelines coming in 2020 that will not only drive earnings, but they will raise the odds of a dividend increase, as well.
MPLX reported EBITDA of $937 million in the third quarter, and distributable cash flow of $766 million, which was up 10% sequentially. This provided MPLX with a healthy distribution coverage of 1.47x, and an ultimate leverage ratio of 3.8x.
EQT is another top holding of AMZA that has multiple projects in the works to drive future earnings, including the Mountain Valley Pipeline (MVP for short), Hammerhead, Southgate MVP, and the Equitrans Expansion Project, to name a few.
In addition to healthy earnings, EQT's cash distribution for the third quarter was 14% higher than the same period as last year, and their coverage ratio was strong at 1.05x. Debt to EBITDA was also strong at 3.0 times, which is less than their top-quality competitors in MPLX LP and Energy Transfer.
ET also has numerous projects in the pipeline that should sustain earnings and dividend payouts for years to come, perhaps more than twice the amount of its peers listed above. ET is also, almost single-handedly, helping E&Ps and oilfield services companies stay alive.
Here is a nice graphic summarizing their future work below: Source: Energy Transfer
ET's leverage is a bit high compared to its peers listed above, but its distribution coverage is still strong at 1.73x (anything between 1x to 1.1x is typically deemed strong).
Leverage for ET may also be high vs. peers, but its planned projects, as mentioned above, dwarf its peers. ET's EBITDA, therefore, should compensate for the added CapEx.
AMZA Technicals Bearish Short Term, Bullish Long Term
AMZA is either displaying extreme value by how cheap its stock price has gotten, or it is merely a falling knife.
The MACD has crossed to the downside, which is bearish on a short-term basis. But shares recently hammered on the 50-day moving average (blue line), which neutralizes the MACD cross to the downside, somewhat.
The 2016 lows were breached, indeed, which is not a welcome sign when considering that AMZA's peers held their 2016 lows. This may be a mark of leverage, though, and not necessarily a problem resulting from the fund manager's actions or its holdings.
Oftentimes, other leveraged ETFs underperform non-leveraged peers in the same manner during downturns. However, when the trend reverses to the upside, leveraged ETFs tend to outperform their counterparts.
Consequently, even though 2016 lows were breached for a brief moment and the MACD crossed to the downside, the onslaught of new projects planned by AMZA's top holdings should allow the fund to emerge from its four-year-long slumber and reverse its course to the upside.
Therefore, the fund's path of least resistance seems higher, since 2016 lows held (roughly, considering leverage), and new earnings are set to exponentially increase earnings in 2019 and 2020.
Perhaps, this is why the 50-day moving average is holding as support after the MACD cross down, and why the fund could make higher highs and higher lows from this point on.
AMZA's unusually high dividend yield of 22.4%, which is one of the highest yields in the midstream MLP space, leads some people to believe that the extra leverage is not attainable without sacrificing dividend yield in some way. In other words, after expense ratios, NAV value, and ROC, the actual yield is more like around 12%.
I have personally been in the fund for six months and have received all of my expected monthly income. The income was ROC (return of capital), but upon asking IR themselves if the income was a negative return of capital in a way that was from selling the stock, they specifically retorted that it wasn't.
Rather, since the fund is an MLP, losses from various actions and strategies can be used for tax advantages, and this is, perhaps, where the ROC comes from. The strategy AMZA uses is very complicated to learn over the phone in ten minutes, and I am paraphrasing the conversation, of course.
The fund has underperformed, no mistaking it, just like its peers. AMZA also fell slightly more than peers, too. But, to me, this is expected with any leveraged ETF.
As long as the upside participation is generally the same, if not better (most MLP ETFs are up about 25% to 30% from their 2018 lows, including AMZA), then I am happy holding AMZA primarily for its monthly income, and the capital appreciation that it is expected to provide over the long run will just act as icing on the cake.
My expectation is that AMZA rallies with other MLPs once the midstream sector returns in favor with institutional investors. 2019 was supposed to be the year that E&P companies received the necessary takeaway capacity to move into manufacturing mode, which is finally here.
AMZA's top three holdings in the fund, who represent almost half of the overall weighting, alone, are meeting their distribution requirements, have multiple projects in the pipeline, and are allowing the entire oil & gas industry to expand at a sustainable rate.
As a result, I continue to stay long AMZA despite its underperformance with other MLPs recently and will allow its robust dividend to pay me while I wait for a sector that's been mired in controversy but is finally reaching the end of a downcycle.
Disclosure: I am/we are long AMZA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.