Momentum is a major factor in today’s market. It can be the wind at energy investors’ backs when oil prices are rising. And it can have the reverse effect, contributing to a slump in energy stocks, if upside in oil is perceived to have run its course. The slide in energy stocks in the first quarter is linked by some analysts to just such a perception that—at least for the near term—oil upside is capped.

Emerging as a winner amidst such market conditions is the midstream-heavy MLP sector.

“After holding the top spot for seven consecutive quarterly surveys, upstream E&Ps fell to the second spot, behind MLPs,” according to Robert W. Baird & Co.’s first-quarter survey of energy investors. MLPs toppled E&Ps in the first quarter as 32% of respondents chose MLPs as their preferred investment sector looking out over the next 12 months. It marked the highest rating since 28% of investors rated MLPs their preferred investment in the final quarter of 2015.

The top rating of 32% in favor of MLPs compared to 21% in the prior quarterly survey. The E&P sector, with a 29% preference, was down from 45% last quarter. Preference for oilfield services climbed to 24%, up from 18%. Those favoring integrated producers, at 7%, made up part of the balance.

Baird said the higher optimism about MLPs was likely driven by rising expectations for year-over-year U.S. crude production growth in 2017 and 2018, which “should benefit MLPs’ throughput volumes.” The survey showed investor expectations in the March quarter to be weighted more heavily to U.S. crude production growth of 5% to 10% in 2017, up from 0% to 5% growth in the December survey.

But will markets penalize energy MLPs if the commodity price is largely range-bound and lacking the momentum needed to move higher? After all, some analysts project that the magnitude of production growth projected for 2017 and 2018 in the U.S.—and specifically the Permian—will likely weigh on future commodity prices. And this outcome is similarly anticipated by investors.

According to Baird, 75% of its respondents expect West Texas Intermediate (WTI) prices to remain in a $50 to $60 per barrel (bbl) range over the next six months, with just 8% foreseeing a move up to $60 to $70/bbl. Over 12 months, 62% saw WTI prices holding in a $50 to $60 range, with 27% predicting a $60 to $70/bbl range.

Tudor, Pickering, Holt & Co. also weighed in with a midstream endorsement—with or without a rise in the commodity price.

If investors are worried that a “massive ramp in U.S. rig activity” translates into sufficient production growth to “keep a lid on any material price appreciation”—a scenario to which Tudor, Pickering does not subscribe—then adjusting portfolio weightings to include more midstream names makes sense, it said.

“With direct commodity exposure in the midstream space at an all-time low,” said a Tudor, Pickering note, “a case where price languishes due to burgeoning production screens well for midstream. With a lower crude price forecast, the call on U.S. is arguably even higher as large-scale global projects wither on the vine and U.S. E&Ps need to meet not only global demand growth, but also to backfill accelerating global declines.”

Importantly, “all that production won’t gather, process and transport itself,” continued Tudor, Pickering. “Utilization can still head higher without price leading the way.”

Michael Blum, senior analyst with Wells Fargo Securities, struck a more cautious tone. In a March note, he reminded investors that oil prices remained “one of the highest drivers of MLP performance,” with a three-year correlation of 0.52, and that “the ultimate performance of the midstream/MLP sector in 2017 will likely be determined by the direction of oil prices.”

Still, the two firms share some common recommendations, with both favoring Kinder Morgan Inc. Other vehicles favored to play midstream include:
• Baird—Energy Transfer Partners LP, Energy Transfer Equity LP and Sunoco Logistics Partners LP.
• Tudor, Pickering—Kinder Morgan Inc. and Targa Resources Corp.
• Wells Fargo—Enterprise Products Partners LP, Kinder Morgan and MPLX LP.

As some say—now focused on midstream—“you pays your money and you takes your choice.”

Chris Sheehan can be reached at csheehan@hartenergy.com or 303-800-4702.