Alma Recurrent Energy Infrastructure Income Fund

Market Review and Outlook

’10+ years ago, investors piled into midstream stocks, seeking exposure to Shale, while wanting to avoid the volatility and oil price correlation found elsewhere in energy. As oil fell in 2014-2020, midstream investors were shocked to see volatility spike and performance become closely tied to oil price. Today, many still cite this period as evidence that midstream is – and always has been – a bet on oil price. But this ignores the fact that operating cash flows were relatively stable throughout the oil price collapse. Instead, the explanatory variable is debt: a massive increase during 2014-2020 pushed equityholders to an increasingly subordinate – and leveraged – position vs. underlying cash flows. Today, as debt leverage has fallen, midstream is once again less volatile and less correlated to oil. The market has started to take note, but many investors still mistakenly put midstream in their “commodity” bucket.

‘Midstream debt has fallen dramatically – and is likely to continue to fall
Perhaps no other graph has been as central to Recurrent’s analysis of the midstream space as the debt/EBITDA chart shown below. It has long been our contention that debt leverage was the primary cause of the midstream sector’s precipitous valuation decline, as well as the rise of unfavorable attributes like increased volatility and correlation to crude oil. As we’ve noted since 2017, since the increase in debt leverage caused the midstream sector’s decline, the reduction in debt leverage has also necessarily been the key driver of the midstream equity recovery we’ve enjoyed since 2020.

Last month, we examined how expanded 2025E capex budgets would impact midstream debt leverage ratios. We showed how 2025E capex budgets (plus dividends) will continue to be covered by midstream free cash flow (FCF). Additionally, as midstream EBITDA and cash flows grow faster than debt loads, leverage ratios are likely to fall again in 2025, based on public company-provided guidance. Notably, the only 2 large-cap midstream companies with modest increases in 2025E leverage (PAA and TRGP) have both incurred debt to refinance mezzanine financings, while PAA has also used 100% debt financing for a bolt-on acquisition. Barring those corporate actions, TRGP and PAA would have both seen 2025E leverage fall meaningfully.

‘The midstream sector has been reducing debt leverage for years – has the market taken note ?
Midstream companies have made incredible progress – going from one of the highest-leverage sectors in the market, to now being meaningfully less levered than other “real asset” sectors like utilities and REITs. Despite the progress made, many investors recall the original fall from grace in the 2014-2020 timeframe, and continue to view midstream as a bet on oil price, or just another energy investment, indistinguishable from Exxon or Schlumberger.

The long-term volatility trend of midstream offers insight as to why many investors remain strongly predisposed to avoid midstream, even 10 years after the original selloff. The historical volatility of midstream was lower than the much more diversified S&P 500 during the late 1990s and early 2000s. Midstream volatility reached levels comparable to the broad market until the oil downturn of 2014, when midstream volatility surged to levels over 100% higher than the S&P.
As debt reduction began in 2018-19, volatility declined, only to spike once again during the COVID selloff. Since COVID, the midstream sector has returned to a level of volatility much more comparable to the broad market (despite midstream index being much less diversified than the S&P). So while many investors remember midstream as a hopelessly volatile asset class, we see below that this reflects the realities of the high-debt 2014-2021 period, and this trading reality has changed as debt leverage has fallen.

‘Has debt reduction been enough to break the shackle of crude oil price correlation ?
Has correlation to oil price fallen along with trading volatility? Once again, we can see how the trading behavior from the late 1990s to the mid-2000s was so attractive to generalist investors: midstream correlations to oil price were almost non-existent. MLPs had lower oil price correlation than the S&P 500 as investors discovered the sector 20+ years ago. As institutional investors discovered the space in the early 2010s, oil correlations rose – but there was little complaining as oil was rising following the Great Financial Crisis. This correlation peaked in the 2014-2021 timeframe, as correlations were consistently 50% to 75% – comparable to an index of oil producers! Worse yet, the late 2010s were a period of very high downside capture – so midstream companies exhibited higher correlation to oil when oil was falling. This helps explain the strong memories of “midstream as an oil bet” as we write 10 years after the fact. Traumatic memories aside, we see that in the last several years trading relationship to oil price has declined fairly dramatically, from >70% correlation in 2016-17 to 50% correlations – closer to the levels of 2008-2013 – but this relationship has fallen further to ~30% in the last 15 months. This recently-observed 30% correlation is comparable to the levels of the mid-2000s – when midstream balance sheets were pristine and Shale drilling was not a meaningful business driver.

‘Many investors remember midstream as volatile, and oil-exposed – ignoring dramatic fundamental improvements of the last 5 years
As broader market volatility has increased in recent months, many investors have found themselves looking for diversifying allocations, or sources of income that are less exposed to potential tariff risks. Many investors instinctively exclude midstream from the list of diversifying allocations, assuming that midstream would simply increase portfolio volatility or add oil correlation. As we’ve shown above, these assumptions are increasingly outdated. As the midstream sector’s debt load has decreased, it has once again offered meaningful diversification benefits, without generating outsized volatility and diminishing portfolio risk-adjusted returns. As we move into 2025, we believe that debt reduction – the driver of lower volatility and improved total returns – will continue to support stable performance with positively-skewed performance.

Fund

During the month of February 2025, the Alma Recurrent Energy Infrastructure Income Fund generated net returns of +0.46%, lagging the Alerian MLP Index’s (AMZ) +3.43% return by -2.97%. Since inception the Fud has a performance of 48.16%