There is a business sector in which the number of publicly traded companies has shrunk by two-thirds over the past decade. This sector provides absolutely essential services to keep the economy running.

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Its consolidation offers investors the potential for long-term, attractive total returns…

From the 1990s through the mid-2010s, energy midstream rewarded investors with excellent returns propelled by attractive yields and rapidly growing dividends. The 2015-2016 energy sector crash put energy midstream into a tailspin, resulting in massive business restructuring and consolidation.

The consolidation has continued over the last decade. Last week I wrote about the pending merger of ONEOK Inc. (OKE) and Magellan Midstream Partners LP (MMP). This deal shows the consolidation continues. In case you missed it, the conclusion is: buy OKE.

Also, last week, MLPguy Week Thoughts provided some eye-opening data. Since 2014 the midstream energy sector has shrunk from 94 companies to just 27. Prior to 2014, the majority of midstream companies were organized as master limited partnerships (MLPs). Now there are just 11 MLPs with market caps over $250 million, including seven over $2 billion. Most midstream companies currently operate as corporations.

The decade of consolidation has resulted in an energy midstream sector that is very financially strong, with excellent investment potential, especially for income-focused investors. Consider these factors:

• Midstream revenues come from fee-based, long-term contracts for pipeline, terminal, and processing services.
• Dividends are well covered by free cash flow, and current yields are very attractive. The Alerian Midstream Energy Index has a current yield of 6.5%.
• Energy midstream companies provide economically essential services, allowing them to increase revenue, free cash flow, and dividend rates.
• Sector consolidation is probably not finished. ONEOK’s Magellan offer was at a 22% premium to the recent company value.

Overall, energy midstream offers investors attractive current yields with dividends that will grow over time. Growing dividends will generate capital appreciation, and further consolidation will generate share price appreciation as the market puts higher valuations on the sector’s revenues and cash flows.

The InfraCap MLP ETF (AMZA) currently yields 8.8% with monthly dividends. In January, the fund increased its dividend rate by 9%. The dividend will increase again in 2024.

AMZA is one of four energy midstream investments I recommend.

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