Midstream & Renewable Energy Infrastructure: Navigating Midstream Through the Balance of the Year

Research evidence excerpt

Midstream & Renewable Energy Infrastructure: Navigating Midstream Through the Balance of the Year

IdeaMinefficient, and is often mispriced. Mispricing was particularly evident in the post-

Covid period of 2021-23, following a three standard deviation valuation correction

that implied effectively no sector terminal value after approximately 20 years (an

incongruity that was notable to observe against regular issuance of 30-year

investment-grade midstream credit). Mispricings can present themselves in different

ways, and today we believe are less broad-based and more selective, but

nonetheless exist.

• More broadly, AQR Capital Management has argued that markets have

become less informationally efficient in the relative pricing of common

stocks, particularly over medium horizons (The Less-Efficient Market

Hypothesis). One of several contributing factors posited for the decline in

market efficiency was the growth in indexing, though noted that correlation

is not proof of causality. Narrow institutional ownership – and, in particular,

MLPs – is the most readily apparent contributor to what we believe is

continued inefficiency and mispricing within the midstream sector

(reminiscent, in our view, of the early/mid-2000s when institutional

participation was similarly limited and performance quite strong). Indexing,

whether directly or through actively managed strategies set against

benchmarks with limited energy/midstream representation, likely goes a long

way to explaining why institutional ownership of midstream remains lower

than other areas of the broader market.

• We believe the midstream sector is in a period similar to that of the early

2000s (2024 Outlook: Explaining the Mispricings in Midstream

Infrastructure). In 2000-06, the average annual AMZX total return was