Midstream Energy Monthly Report | May

Midstream Energy ETF: Key Takeaways

At the end of April, the underlying index for the Alerian Midstream Energy Dividend UCITS ETF (MMLP), AEDW, was yielding 6.57%. AEDW was trading at 10.26x 2023 EBITDA estimates per Bloomberg – a discount to the historical (ten-year) average EV/EBITDA multiple for midstream of ~12x. [1]

Gains in commodity prices and inflation concerns contributed to the outperformance of energy equities relative to the broader market. On a net total-return basis, AEDW fell modestly -2.45%, while the S&P 500 was down -8.72% on a total-return basis in April. AEDW slightly trailed the Stoxx Europe 600 Oil and Gas Index (SXEP), which rose 2.30% on a price-return basis for the month.[2] Benchmark US oil prices continued their upward trend in April, rising 4.40% to end the month just under $105 per barrel. US natural gas prices saw counter-seasonal strength last month, soaring by 28.39% on colder weather, tight inventories, and continued robust demand from LNG export facilities.[3] Energy equities, including midstream, have strongly outperformed thus far in 2022 as broad market indices saw their worst performance for the first four months of the calendar in over 80 years. Year to date, AEDW has delivered a net-total return of 18.34% while the S&P 500 has fallen -12.92% on a total-return basis. [4]

April marked the start of 1Q22 earnings season for midstream, with a handful of names reporting 1Q22 results and all names in the portfolio announcing their dividends. There were no dividend cuts across the index. Nine constituents, representing 38.1% of the index by weighting, announced sequential dividend increases, while 16 names, representing 61.91% of the index by weighting, maintained their dividends. Some of the more notable sequential increases include Plains All American (PAA/PAGP),[5] which raised its quarterly distribution by 20%, and Energy Transfer (ET), [6] which raised its distribution by ~14% following a ~15% sequential increase to the 4Q21 payout.

Kinder Morgan (KMI) kicked off earnings season with a solid 1Q22 print that included an EBITDA beat and management expectations for full-year results to be favourable relative to the budget previously provided.[7] KMI also raised its quarterly dividend by 2.77% to $0.2775 for 1Q22, in line with its previous announcement.

Aside from earnings releases and dividend announcements, several names also announced new partnerships related to the energy transition in April. PAA/PAGP announced it signed a memorandum of understanding with Atura Power to assess the feasibility of an underground hydrogen storage project in Canada.[8] EPD announced it signed a letter of intent with Oxy Low Carbon Ventures to develop a carbon capture and sequestration project on the Texas Gulf Coast. [9]

Please note that all performance figures are showing net data. Past performance is not a guarantee of future performance

Macro Outlook

We observed that energy infrastructure companies continued to benefit from strengthening energy sentiment as oil and gas prices extended their surge in March. While the rally in commodity prices has been accompanied by sharp price swings and increased uncertainty following recent geopolitical events, energy infrastructure companies are better insulated from a volatile commodity price environment due to fee-based businesses that generate steady cash flows.[10] Dividend growth has become more prevalent across the energy infrastructure space as companies prioritize returning more capital to shareholders. Though yields have come down with stronger equity performance, the energy infrastructure space continues to offer yields well above other income-oriented sectors. Dividend growth is being complemented by buybacks. Looking ahead, with the outlook for significant free cash flow intact, the financial flexibility to return more capital to shareholders complements macro tailwinds that are fuelling the strong outperformance for energy infrastructure companies. [11]

MMLP Performance Table (As of 30.04.22)

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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