Part 1: An Introduction to Midstream Energy Infrastructure
Part 2: Understanding the Pipeline Business
Part 3: Midstream Energy: Investment Case
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. Please seek independent tax advice
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.
Favourable Income Yield
% Yield Comparison
Past performance is no guarantee of future returns. Source: Alerian, Bloomberg. Data as of 30/06/21. US Bonds = US Bloomberg Barclays Aggregate Bond Index. REITS = FTSE NAREIT Real Estate 50 Index. Utilities = S&P 500 Utilities Index.
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
Resilience of Midstream Forward EBITDA Estimates After Oil's Collapse Contrasts with Other Energy Sectors
Past performance is no guarantee of future returns. Data reflects the percentage change in 2020 and 2021 index-level EBITDA estimates from 31/01/2020 to 30/06/2021. Source: Alerian, Bloomberg. Data as of 30/06/2021
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
Past performance is no guarantee of future returns. Source: Alerian, Bloomberg. Data as of 30/6/2021.
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.
US Crude Production and Liquids Exports Have Grown Significantly Since 2010
For illustrative purposes onlyLiquids exports include crude, petroleum products, and natural gas liquids. Source: US Energy Information Administration as of 30/06/21
Past
performance is no guarantee of future performance
US Natural Gas Production and Exports Have Grown Significantly
Since 2010
For illustrative purposes only. Source: US Energy Information Administration as of 30/06/21
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
|
0.47
|
0.83
|
0.13
|
0.81
|
|
5-Year
|
0.35
|
0.77
|
0.09
|
0.78
|
Past performance is no guarantee of future returns. Source: Alerian, Bloomberg. Data as of 30/06/2021. US Bonds = US Bloomberg Barclays Aggregate Bond Index. REITS = FTSE NAREIT Real Estate 50 Index. Utilities = S&P 500 Utilities Index. Correlations were calculated monthly for the trailing three and five years ending 30/06/2021 Please note that all performance figures are showing net data.
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.