muhammet sager
Introduction
The energy sector has had a dream run in 2022. Vanguard’s Energy index (VDE) is up 62%. O&G related players have been the main beneficiaries of this trend. Within O&G, upstream players have done better, benefiting from increased oil and gas prices.
So far, although the upstream O&G companies have generated strong cash flows, they have been very stringent on new capex announcements. But I believe this cautious stance can only go on for so long as the world’s cries for O&G supply will only get louder over time as green energy alternatives still need time to mature.
When O&G supply floods the market, midstream O&G players will be major beneficiaries. And the InfraCap MLP AMZA (NYSEARCA:AMZA) is one of the ETFs offering exposure to this theme.
If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post, which explains how and why I read the charts the way I do, utilizing principles of Flow, Location and Trap.
Mapping Out the O&G Value Chain
Oil and gas prices have different effects on companies in the oil and gas (O&G) value chain. Here is a breakdown of the value chain, along with their sensitivity to the underlying commodity prices:
- Upstream; which relates to exploration and production activities. For example, my previous analysis on NOV (NOV) explores O&G drilling prospects in the United States. Companies in this part of the value chain benefit the most when the underlying commodity prices rise.
- Midstream; which relates to transportation and storage of extracted O&G. Companies in this part of the value chain typically are not sensitive to underlying commodity prices. They benefit from long term contracted businesses and the key driver of growth is uptick in production volumes.
- Downstream; which relates to production of refined products such as petrol, marketing and distribution to retail end-use markets. Companies in this part of the value chain may benefit when their input costs on the underlying commodities’ prices fall.
Upside Potential is Building Up on AMZA
The InfraCap MLP ETF gives exposure to mid-stream oil and gas (O&G) stocks in the United States.
Read of Relative Money Flow
AMZA vs SPX500 Technical Analysis (TradingView, Author’s Analysis)
An upward movement on the relative chart of AMZA/SPX500 means AMZA is outperforming the S&P 500 (SPY). Conversely, a downward movement means the AMZA is underperforming the S&P 500.
The AMZA/S&P 500 pair currently shows a bullish trend, with all pointers showing a return to the monthly resistance. According to my read, a trap sighting already occurred a while back in March 2020 and what we’re witnessing is the after-effects of that bullish spring. The AMZA/SPX500 pair is moving along an inclined accumulation phase, steadily driving the price to the target monthly ceiling. A sharp blast up is likely due soon!
Read of Absolute Money Flow
AMZA Technical Analysis (TradingView, Author’s Analysis)
The AMZA standalone monthly chart paints an even clearer picture of the trajectory of the ETF. After a 93% descent, ending with a sharp drop in price followed by a sharp rejection, AMZA is making a sweeping move for the $44.10 monthly resistance.
In my view, I see a medium-term pullback toward the $27.15 support mark, which should fuel a bullish spring release. How the price reacts to this ceiling is yet to be determined. Overall, I believe AMZA will make bullish moves on an absolute basis as well over the next few months.
AMZA ETF Composition
The AMZA ETF is a concentrated index with 10 key holdings:
AMZA ETF Exposure (AMZA ETF Website, Author’s Analysis)
Energy Transfer (ET), MPLX (MPLX), Enterprise Products Partners (EPD), Western Midstream Partners (WES) and Plains All American Pipeline (PAA) are the top 5 holdings that make up 74.3% of the overall index.
Key Fundamental Driver and Monitorable
Volume growth is the most important driver for the US midstream O&G sector and hence the AMZA. A major catalyst is building up in the sector due to the under-investment in O&G to meet demand. I discuss this more extensively in my article on NOV here. This major catalyst would be a stream of upstream O&G capex announcements. Why would this happen? One simple reason:
According to the International Energy Agency, the world’s O&G industry needs to spend nearly 50% more annually ($466 billion) from 2022 to 2030 to meet global oil demand.
Early green shoots of this catalyst are already visible; a 10-15% increase in capex budgets is expected by some private exploration and production (E&P) companies. I believe it is just a matter of time till this trend picks up.
Upstream O&G capex investments, when they come online increase volumes for the midstream O&G sector. This would be the fundamentals kicker to support the bullish technicals.
Summary
Overall, I believe the US midstream O&G sector is poised well to benefit from eventual capacity additions prompted by under-investment in O&G. AMZA ETF is currently showing bullish signs. I expect it to generate positive absolute returns going forward, and also outperform the S&P 500.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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