Canadian oil and gas producers continue to contend with lower price realizations than their counterparts south of the border, reflecting intensifying competition from US shale plays and, in the case of crude, takeaway constraints.

This challenging environment means that investors should place a premium on quality and remain disciplined.

In the upstream space, Canadian Natural Resources (TSX: CNQ, NYSE: CNQ) and Suncor Energy (TSX: SU, NYSE: SU) continue to consolidate and build economies of scale as integrated oil companies and diversified independents seek to monetize their oil-sands assets.

Based on current valuations and the macro outlook, we continue to prefer best-in-class midstream operators and power producers for investors looking to add exposure to Canada’s energy patch. Many of our favorite Canadian midstream players also tend to trade with less volatility than their peers in the US.

More important, Alberta’s Climate Leadership Plan, which calls for the province shutter its coal-fired power plants by 2030, creates a longer-term opportunity for low-cost natural-gas producers and midstream operators to grow their volumes. We break down the names that are best-positioned to take advantage of this shift. Investors should also check out our International Coverage Universe for update comments and ratings.

The so-called drop-down transaction—where a sponsor sells an asset to its associated master limited partnership (MLP)—has a long history (dating back to 1983) as a strategy for energy companies to monetize their midstream (pipelines and processing) assets.

Not only does this approach unlock the value of midstream assets that a refiner or upstream operator may not have run for a profit, but the parent also retains control of this critical infrastructure and garners a growing stream of cash flow via their incentive distribution rights.

The number and total value of drop-down transactions announced surged in 2010 and continued to climb in subsequent years, peaking in 2015. Deal flow slowed considerably in 2016 but remained elevated relative to historical norms.

Although this overweight position worked for a time and these stocks held their value reasonably well during the down-cycle, MLPs that rely heavily on drop-down strategies have underperformed since the start of 2016.

We explore the factors driving this underperformance, explain why all drop-down stories aren’t created equal and make the case for some of our favorite names in the current environment.