The strength in oil and natural gas prices continued in October. Adding to the upward momentum, most AEDW constituents announced their quarterly dividends during the month. Twenty-one names maintained, and four names increased their payouts, while just two names have yet to announce their dividends as of 2 November, 2021. (Source: Alerian)
On a net total return basis, AEDW gained 6.01%, outperforming the Stoxx Europe 600 Oil and Gas Index (SXEP), which was up 3.96% on a total-return basis in October. The index was reconstituted in October, with International Seaways Inc (INSW) removed.
A handful of constituents announced new ESG initiatives and/or energy-transition related partnerships this month, highlighting the attractiveness of midstream assets and capabilities in the energy transition. TC Energy (TRP) announced its collaboration with Nikola (NKLA, not in AEDW) to co-develop large scale hydrogen production facilities in the United States and Canada. [1] Pembina Pipeline Corporation (PPL CN) announced its commitment to a 30% greenhouse gas (GHG) emission intensity reduction by 2030 relative to 2019 levels. [2]
Largely stable dividend announcements with some examples of growth add confidence to the reliability of midstream income. Furthermore, we believe strong free cash flow generation and several buyback authorizations among index constituents also offer a potential compelling total return opportunity. Magellan Midstream Partners (MMP) announced a 1% increase in its distribution and the exhaustion of its initial $750 million buyback, while announcing an additional $750 million buyback authorization through 2024. [3] MPLX (MPLX) announced a 2.5% increase in its base distribution and a special dividend of $0.575 per share. [4]
At the end of October, the underlying index for the Midstream Energy ETF, AEDW, was yielding 6.85% with investment-grade companies represented 84.28% of the index by weighting. At month end, AEDW was trading at 10.17x 2022 EBITDA estimates per Bloomberg – a discount to the historical (ten-year) average EV/EBITDA multiple for midstream of ~12x.
Past performance is no guarantee of future performance.
Macro Outlook
We observe that midstream sentiment remains on positive footing as the space continues to provide attractive income, generate free cash flow and enjoy the tailwinds from an increasingly supportive macro backdrop, driven in part by a strong commodity price rally that continued through October. Midstream remains well-positioned for inflation given its real asset exposure and leverage to the energy markets—which tend to do well in inflationary environments. Furthermore, midstream contracts typically have built-in inflation escalators, and/or companies have the ability to pass-through higher costs to customers. In the short-term, we believe investors will shift their focus to 3Q21 earnings seasons as most names are set to report in November, which will provide a fuller picture of 3Q21 and insights into the year ahead. Companies are expected to continue to generate substantial free cash flow, which will be used to support generous dividends, and in some cases, buybacks as well.
Midstream ETF Performance Table (As of 31.10.21)
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|
1M
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3M
|
6M
|
YTD
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12M
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SI
|
|
Alerian Midstream Energy Dividend UCITS ETF
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6.07%
|
6.76%
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11.60%
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43.44%
|
72.51%
|
60.26%
|
|
Alerian Midstream Energy Dividend Index (NTR)
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6.01%
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6.57%
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11.25%
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42.41%
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70.95%
|
57.81%
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Source: Bloomberg / HANetf. Data as of 31/10/2021
Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Please note that all performance figures are showing net data.
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