Midstream Energy Monthly Report | January

Midstream Energy ETF Monthly Report: Key Takeaways

• At the end of December, the underlying index for the Alerian Midstream Energy Dividend UCITS ETF (MMLP), AEDW, was yielding 7.33% with investment-grade companies represented 83.75% of the index by weighting. At month end, AEDW was trading at 9.61x 2023 EBITDA estimates per Bloomberg – a discount to the historical (ten-year) average EV/EBITDA multiple for midstream of ~12x. [1]

• We believe that concerns about Omicron easing, drove a slight improvement in oil prices and energy sentiment. On a net total return basis, AEDW gained 1.57%, slightly underperforming the Stoxx Europe 600 Oil and Gas Index (SXEP), which rose 4.27% on a total-return basis in December. WTI oil prices closed the year with a 55.01% gain after rallying 13.64% in December. For the year, AEDW gained 34.07%, handily outperforming the 22.4% total return for the SXEP.

• Free cash flow generation, buybacks, and dividend growth remain topical for midstream. Various key names have announced financial guidance for 2022, including expected dividend increases. Enbridge (ENB) guided to 9% EBITDA growth and announced a 3% increase to its common dividend in 2022, as well as formally introducing a share repurchase program of up to $1.5 billion starting in 1Q22. [2] At its annual investor day in December, TC Energy (TRP) highlighted its long-term growth outlook that includes growing the common dividend by 3-5% and EBITDA growth of 5% on average through 2026. [3] Kinder Morgan (KMI) guided to 5% EBITDA growth in 2022 (excluding one-time storm benefits from 2021), a 3% dividend increase, and up to $750 million available for opportunistic buybacks. [4] Pembina Pipeline (PPL) forecasts 3% EBITDA growth for 2022 and the expects to allocate up to $200 million of excess cash flow to buybacks in 1H22. [5]

Please note that all performance figures are showing net data.

Macro Outlook

Looking ahead to 2022, key themes from 2021 remain intact, namely free cash flow generation and the potential for buybacks as evidenced by the recent announcement of ENB’s buyback program and PPL’s 2022 capital allocation plan. As of December 31, 2021, roughly 69% of the AEDW Index by weighting had a buyback authorisation in place. [6] In addition to free cash flow generation, improving balance sheets, more normalised yields, and a relatively stable macro environment may support more widespread dividend increases in 2022. For the space broadly, dividend growth is likely to align with the low-to-mid single digit increases announced by KMI, TRP, and ENB. The improvement in commodity prices should support moderate growth in US oil and natural gas production in 2022, which should also bode well for midstream. [7] The space remains well positioned for inflation given real asset exposure and the nature of midstream contracts, which often have built-in inflation adjustments. Overall, a constructive macro environment and company-level tailwinds from solid free cashflow generation should be supportive for midstream in 2022, complementing the attractive income on offer. [8]

Midstream Energy ETF Performance (As of 31.12.21)

Source: Bloomberg / HANetf. Data as of 31/12/2021. Please note that all performance figures are showing net data. 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.

Learn more about our Midstream Energy ETF

Download the PDF