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Midstream Energy: An Investment Case | MMLP

 

Why Add Energy Infrastructure to Your Portfolio?

  • Yield Enhancement: MLPs pay no taxes at the entity level so they can pay out more of their cash flow to investors as distributions. Midstream corporations also offer generous income.
  • Stable Cash Flows: Midstream companies are largely fee-based, volume-driven businesses that play a vital role in connecting North American energy production with rising long-term demand globally.  This results in more stable cash flows relative to other energy sectors
  • Defensive Energy Exposure: Given the fee-based nature of midstream, cash flows are less sensitive to commodity price volatility compared to other sectors of energy, such as oil and gas producers.
  • Real Assets: Exposure to long-term physical assets that generate inflation-protected cash flows
  • Diversification: Low correlation to other income-orientated investments like bonds or REITS. MLPs are not included in most broad market indices.
  • Tax Efficiency: For European and Asian investors, there is no withholding tax payable on the dividends paid by the ETF

 

Risks of Adding Energy Infrastructure to Your Portfolio    

  • Commodity Price Sensitivity – Since MLPs and energy infrastructure companies do not own the oil and gas they transport, their business performance is not directly connected with the price of oil or gas.
  • Legislative Risk –Legislative risk mostly stems from the potential that Congress could change or abolish the beneficial MLP tax structure.
  • Renewable Energy - The potential for renewable forms of energy (solar, wind, hydro) to replace hydrocarbon-based energy is both the largest and least immediate risk to energy infrastructure.
  • Risks of trading ETFs -As with all ETFs, your capital is at risk and you may not get back the full amount you invested.  Past performance is  no guarantee of future performance.

Risks are explained in more detail below.

 

Favourable Income Yields

Past performance is no guarantee of future performance  

REITSs are represented by the FTSE NAREIT Real Estate 50 Index. Utilities are represented by the S&P 500 Utilities Index. Bonds are represented by the Barclays US Aggregate Total Bond Index.
Source: Alerian, Bloomberg as of May 29th 2020

 

MLPs and energy infrastructure corporations provide a greater yield than other income-oriented investments. MLPs can pay out more of their cash flow as distributions because they do not pay taxes at the entity level. Energy infrastructure corporations draw on the legacy of generous payouts from MLPs and tend to offer robust income as well, although yields tend to be lower for corporations than MLPs.

 

Stable Cash Flows

Data reflects the percentage change in 2020 and 2021 index-level EBITDA estimates from January 31, 2020, to May 29, 2020. Estimates from January 31, 2020 used for comparison were based on estimates for index constituents at that time.

Source: Alerian, Bloomberg as of May 29, 2020

 

Unlike other sectors of energy, the midstream space is less dependent on the prices of oil and natural gas given that these companies are largely collecting fees for services provided. For example, an oil pipeline will collect a fee for each barrel of crude transported, or the owner of a storage tank will collect rent for the leased storage space. The resiliency of midstream cash flows is evident when compared to other sectors of energy that saw dramatic declines in consensus EBITDA estimates for 2020 and 2021 in the wake of oil’s price decline. Even with oil’s collapse, midstream forward EBITDA estimates for 20201 and 2021 saw only modest revisions, setting midstream apart from broader energy and exploration and production companies shown.

Midstream companies perform defensively compared to other energy assets

 

Source: Alerian, Bloomberg as of May 29, 2020
 Past performance is no guarantee of future performance

 

Relative to other sectors of energy, MLPs and energy infrastructure corporations tend to perform more defensively (less sensitive to oil prices) given the fee-based nature of their businesses. Midstream contract protections like minimum volume commitments help ensure revenues for the company even in challenging market environments where volumes may otherwise be declining. MLPs are not immune to movements in oil prices, which tend to impact sentiment for the energy sector and have implications for US oil production. However, the energy infrastructure business model of providing services for a fee helps insulate the space from oil and natural gas price volatility as demonstrated in early 2020.

 

Growth Outlook

 

Liquids exports include crude, petroleum products, and natural gas liquids.
Source: US Energy Information Administration as of May 29, 2020

Past performance is no guarantee of future performance

 

US Natural Gas Production and Exports Have Grown Significantly Since 2010

 

 

With improved technologies unlocking the vast potential of US shale reserves, the US has become the world’s largest producer of both oil and natural gas. MLPs and energy infrastructure companies provide the critical infrastructure that facilitates everyday life from driving a car to cooking with a natural gas stove to supplying natural gas power plants that generate electricity. While much of the produced energy is consumed domestically, the US has also become a significant energy supplier to the rest of the world, exporting crude oil, natural gas liquids, and liquefied natural gas (LNG) to countries around the globe. Exports require significant energy infrastructure – facilities to process natural gas and natural gas liquids into usable form, pipelines to move hydrocarbons to the coasts, and export terminals to load hydrocarbons onto ships.

 

Diversification

  Utilities REITs Bonds S&P 500
3 Year 0.50 0.81 0.18 0.82
5 Year 0.35 0.68 0.14 0.77

Source: Alerian as of May 29, 2020  
Correlations were calculated monthly for the trailing three and five years ending May 29, 2020.
REITs are represented by the FTSE NAREIT Real Estate 50 Index. Utilities are represented by the S&P 500 Utilities Index. Bonds are represented by the Barclays US Aggregate Total Return Bond Index.

 

Energy infrastructure provides diversification relative to broader market indices as well as other income-oriented investments. For portfolios increasingly allocated to passive products tracking well-known market indices, the diversification benefit of midstream may be particularly attractive. For example, there are currently only three midstream corporations included in the S&P 500 – ONEOK (OKE), The Williams Companies (WMB), and Kinder Morgan (KMI). MLPs are not included in broader market indices. Notably, energy infrastructure has relatively low correlations with other income-oriented investments, including Utilities and Bonds. Adding midstream to an income portfolio with these investments could provide diversification while also enhancing the income profile of the portfolio.

Many investors use MLPs as part of their equity income, real estate or energy allocations with a typical allocation of 3%-6%. It’s important to keep in mind that investments in MLPs come with risks, as do all equity investments.

 

The Alerian Midstream Energy Dividend UCITS ETF Dist

In July 2020, HANetf and Alerian launched the Alerian Midstream Energy Dividend UCITS ETF Dist (MMLP)which seeks to track the price and yield performance , before fees and expenses, of the Alerian Midstream Energy Dividend IndexTM (Total Return).  

The fund offers diversified exposure to energy companies involved in the processing, transportation and storage of oil, natural gas and natural gas liquids in the US and Canadian market and includes MLPs and C-corps.     

It is the first UCITS ETF to provide exposure to the energy infrastructure sector via an Alerian index. By employing a synthetic strategy, MMLP enables efficient replication of the index.              

The index is fundamentally-weighted by dividends in a transparent, straightforward process. Each company’s total distribution is calculated as shares outstanding multiplied by its annualized dividend based on the most recent dividend.  

Each constituent’s weight is then calculated by taking its total distribution and dividing by the sum of all in index constituent distributions. Finally, a 10% cap is applied to constituent weights.  

Simply put, companies that pay out more cash flow per share are weighted higher relative to peers that distribute less. MMLP is rebalanced quarterly and reconstituted annually. Quarterly re-balances occur in January, April, July, and October, with only the weightings of constituents adjusted.  

Excluding spin-offs, companies can only be added to Alerian Midstream Energy Dividend UCITS ETF during the annual reconstitution in October. However, constituents can be removed from the index between reconstitutions due to special situations such as mergers, acquisitions, or bankruptcies. 

 

Exchange Bloomberg Code RIC ISIN SEDOL Currency TER
London Stock Exchange MMLP LN MMLP.L

IE00BKPTXQ89

BMVFZ02 USD 0.40%
London Stock Exchange PMLP LN PMLP.L

IE00BKPTXQ89

BL96TT7 GBP 0.40%
Borsa Italiana MMLP IM MMLP.MI

IE00BKPTXQ89

BMHVZQ0 EUR 0.40%
Deutsche Boerse Xetra JMLP GY JMLP.DE

IE00BKPTXQ89

BMHVZP9 EUR 0.40%

 

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