Midstream Energy Monthly Report | July

Midstream Energy ETF: Key Takeaways

At the end of June, the underlying index for the Alerian Midstream Energy Dividend UCITS ETF (MMLP), AEDW, was yielding 7.09%. AEDW was trading at 9.78x 2023 EBITDA estimates per Bloomberg – a discount to the historical (ten-year) average EV/EBITDA multiple for midstream of ~12x. [1]

The combination of mounting recession fears and profit taking put significant downward pressure on energy equities in June. Energy companies were also pressured by falling commodity prices that weighed on sentiment. [2]

On a net total-return basis, AEDW fell -12.68% in June and slightly trailed the Stoxx Europe 600 Oil and Gas Index (SXEP), which fell -10.94% on a net total-return basis for the month. Despite heightened volatility, WTI oil prices held up relatively well, falling only -7.77% for the month. Natural gas prices at Henry Hub fell by -33.41% in June for their first loss in four months, as a fire at privately-owned Freeport LNG resulted in extended downtime and contributed to a build in natural gas supplies.

Energy equities, including midstream, recorded strong outperformance relative to the broader market in the first half of 2022 despite energy’s underperformance in June. Year to date through June 30, AEDWN has gained 9.98% on a net total-return basis, while the S&P 500 (SPX) has fallen -19.96% on a total-return basis—marking the worst first half for the broad equity index since 1970.

• As many countries look to replace Russian energy, the abundance of resources in the US has taken on new importance, particularly for US liquefied natural gas (LNG). With a strong outlook for US LNG demand, export capacity is expected to increase significantly in coming years, which requires more natural gas infrastructure. Enbridge (ENB CN) and Williams (WMB) are among the names that have recently announced pipeline projects to supply LNG export facilities. [4]

• Midstream companies have been leveraging strong cash flow generation to pursue inorganic growth opportunities through accretive acquisitions of gathering & processing (G&P) assets. Targa Resources (TRGP) is acquiring Lucid Energy (not in the portfolio) for $3.55 billion in cash.[5] DCP Midstream (DCP) will acquire G&P assets from Woodland Midstream (not in the portfolio) for $160 million.[6] Both acquisitions will expand the companies’ footprints in the prolific Permian basin. 

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

Macro Outlook

While concerns over a potential recession could drive further volatility for energy stocks, energy infrastructure should fare better than other energy subsectors given the defensive qualities afforded by fee-based business models. Midstream outperformed the broader energy sector and the S&P 500 during the 2001 recession and 2007-2008 financial crisis.[7] Despite the sell-off in June, the fundamental outlook for midstream remains largely unchanged.

Key themes for the year, including free cash flow generation and returning cash to unitholders through buybacks and dividends, remain intact. Commodity prices are at levels that will incentivize measured volume growth from US oil and gas producers, particularly as concerns over global energy security have placed new importance on US energy.[8] Looking ahead, earnings season for 2Q22 will begin later in July, which could bring more attention to the positive fundamentals in the space and help serve as a catalyst for a rebound in equity performance.

MMLP Performance Table (As of 30.06.22)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 30/06/2022. Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. 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. When you invest in ETFs and ETCs, your capital is at risk.

Learn more about our midstream energy ETF.