Investors seeking passive income prioritize not only yield but also dependable cash flows that can withstand economic and global instability. Energy infrastructure and shipping are particularly well-suited to deliver consistent returns and strategic advantages when global supply chains face challenges.
The Global X MLP ETF(NYSEMKT: MLPA), Equinor(NYSE: EQNR), and Flex LNG(NYSE: FLNG) offer excellent investment opportunities for passive-income-seeking investors. In addition, as I will shortly outline, they are all stocks with significant upside exposure to an ongoing closure of the Strait of Hormuz to commercial traffic.
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As such, they will suit investors seeking yield and some protection from the risk of a protracted conflict in the Persian Gulf.
In theory, this exchange-traded fund (ETF) is agnostic to the price of energy (in this case, gas). In reality, it is somewhat different. The ETF invests in 20 master limited partnerships (MLPs) in the midstream and storage sector. While upstream energy companies (exploration and production) tend to be positively related to high energy prices, and downstream energy companies are negatively related (energy is their raw material cost), midstream (transportation and storage) companies are supposed to be neutral.
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The MLPs emphasise their long-term take-or-pay contracts, which create a reliable stream of income regardless of volume or gas pricing. This income certainty means MLPs can pay large dividends/distributions to investors, which is why the ETF has such a high yield.
However, if there is a structural shift (possibly caused by an extended conflict or by structural damage to energy infrastructure in the Gulf), investment is highly likely to flow to North American energy assets. That could improve volumes and strengthen MLPs’ negotiating position in their non-take-or-pay contracts, while benefiting from higher volumes under those contracts.
If 20% of global oil and gas previously flowed through the Strait of Hormuz, and it continues to close, then pressure is highly likely to build on parts of the world that rely on it. While Europe’s exposure is relatively small (it imports about 7%-10% of its liquefied natural gas and slightly less than 5% of its crude oil from energy flowing through the Strait), Asia is heavily exposed. As such, demand from Asia is highly likely to push up prices in European countries.
All of which works in favor of Norwegian oil and gas giant Equinor, which is positioned to provide the answer to the problem of filling the gap created by a lack of oil and gas from the Gulf, as it did when Europe moved away from Russian energy after the conflict in Ukraine escalated.
The company’s core oil and gas assets are off the coast of Norway, and it’s ideally positioned to help Europe meet its energy needs.
The Norwegian angle also plays out in the liquefied natural gas (LNG) shipping company, Flex LNG. It’s listed in the U.S., legally incorporated in Bermuda, but has its origins and operational headquarters in Norway.
With 20% of the world’s LNG previously flowing through the Strait of Hormuz, its closure has significant ramifications for LNG shipping, and most of them are positive for Flex.
Not only did the closure send spot shipping rates sharply higher, but there are also longer-term considerations. For example, if LNG shipping will now follow longer routes, say, with LNG from the U.S. going to Asia rather than Europe, then fewer ships will be available. That paucity of supply is likely to drive rates higher for available ships, and that’s great news for shippers.
Moreover, FLEX’s relatively modern fleet (13 liquefied natural gas carriers with an average age of 6.3 years) comes to the fore as newer carriers tend to be more efficient and reliable than older ships.
All of these stocks have performed well recently, and there’s always the possibility that a quick resolution to the conflict will see a normalization in operations and energy prices. That would be good news for most portfolios.
Still, there’s also a risk of ongoing conflict and structural damage to energy infrastructure in the region, creating longer and deeper problems that these companies will help to solve. As such, buying them helps reduce portfolio risk.
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