Midstream Energy Monthly Report | August

• While 2Q earnings results for midstream have been mixed thus far, dividends have been steady with over 95% of MMLP’s underlying index by weighting maintaining dividends at the same level as the prior quarter. 
• The underlying index for The Alerian Midstream Energy Dividend UCITS ETF (MMLP) has outperformed broader energy year-to-date supported by fee-based cash flows and generous income.
• The purchase of natural gas infrastructure assets by Warren Buffett’s Berkshire Hathaway in a nearly $10 billion deal helps highlight the value of North American midstream.
• With 2Q representing the brunt of COVID-19 impacts on energy markets, a recovery in demand and production trends should support midstream improvements into 3Q.

Performance Review 

Performance of Alerian Midstream Energy Dividend Index (AEDW)

• July: AEDW -1.01% 
• WTI oil prices rose 2.55% in July but are down -34.05% YTD through July 31.

Yield The current yield for AEDW is 11.13%*, which is elevated relative to the five-year average of 7.35%. Current/past performance is no guarantee of future performance. 

Alerian Midstream Energy Dividend Index Performance

Past performance is no guarantee of future performance. 
Figures based off LBMA PM Gold Price Source: Alerian
*July figures based on 01.07.20 - 31.07.20 **12 Month figures based on 30.06.19 - 31.07.20

Dividend yield

Current performance is no guarantee of future performance
Index yield annualizes the most recent dividend announcement for each constituent and takes into account current index weightings.
*July figure based on 31.07.20 Source: Alerian

What Has Driven This Performance?

Though midstream has improved from its March 2020 record lows, weak equity performance year-to-date continues to reflect the demand headwinds from COVID-19 on energy and uncertainty around the pace of recovery. However, the fee-based nature of midstream and generous income has supported AEDW’s outperformance relative to broader energy as represented by the IXE comparison above. Earnings results for 2Q from some large names have reinforced the advantages of the midstream business model, namely the durability of fee-based cash flows in volatile markets. The space continues to screen attractively based on forward EV/EBITDA multiples, with AEDW trading at 9.3x consensus 2021 EBITDA estimates based on a weighted average compared to a historical (ten-year) average multiple for midstream of ~12x. With macro headwinds and uncertainty persisting, midstream is expected to continue to provide more defensive energy exposure, particularly relative to energy sectors that are more dependent on commodity prices.

Alerian Midstream Energy Dividend Index (NTR) and MLP ETF Performance

Total Return NAV to Date (up to 31/07/2020)

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. Source: Alerian. Data as of 31/07/20

Industry News

Earnings season mixed thus far in challenging quarter. Energy earnings season kicked off in late July with some of the larger midstream names reporting. The second quarter represented the brunt of COVID-19 impacts on energy markets in terms of weakened demand and reduced production, as US and Canadian producers shut in wells in response to weak oil prices. Thus far, results have been mixed relative to consensus estimates. However, outlooks have been mostly steady. 

Dividends largely stable. After several smaller names cut their dividends earlier this year, AEDW constituents have largely maintained their payouts for 2Q (i.e. dividends paid in 3Q). Of AEDW’s 31 constituents, 28 companies representing 96.59% of the index by weighting as of the July rebalancing have maintained their dividends. One constituent, Cheniere Energy Partners (CQP), raised its distribution. As of July 31, two names had yet to announce their dividends.

Pipelines make headlines in July with Buffett acquisition and regulatory headwinds. Warren Buffett’s Berkshire Hathaway is purchasing the natural gas infrastructure assets of utility Dominion (D) in a nearly $10 billion deal. The purchase by a renowned investor highlights the attractiveness of North American energy infrastructure and the steady cash flows generated by these assets. On a more negative note, Dominion cancelled its Atlantic Coast Pipeline project, which has faced regulatory headwinds as well as escalating costs and delays. The cancellation and challenges for newbuild pipelines in certain areas reinforce the value of existing pipelines. Also on the regulatory front, the Dakota Access Pipeline is the subject of an ongoing court case, which could require the pipeline to shut down as an environmental study is completed. AEDW constituents Energy Transfer, Phillips 66 Partners, MPLX, and Enbridge have ownership interests in the pipeline.

Outlook

Several weeks of relative stability in oil prices has put the energy space on firmer footing, with US and Canadian producers restoring production that had been shut-in when prices collapsed in 2Q. Returning production volumes and improving demand should lead to sequential improvement in financial performance for midstream in 3Q. While macro headwinds persist, dividend stability and consistency in company outlooks for the balance of 2020 are reassuring for midstream investors. Earnings announcements and accompanying outlooks will remain in focus into August, but as summer expires, attention will increasingly shift to the upcoming US election in November.

Constituent News

Enterprise Products Partners (EPD) announced 2Q results on July 29, [1] exceeding analyst expectations, as positive results in storage and marketing helped offset weaker results from natural gas gathering and processing as well as petrochemicals. EPD highlighted the durability of its fee-based business model as well as its diversification and integration as advantages in an uncertain market environment.

TC Energy (TRP.CN) reiterated plans to grow its dividend by 8-10% in 2021 and 5-7% thereafter with its 2Q earnings update. [2] The company continues to progress a suite of growth projects representing a $37 billion investment opportunity, including $5 billion in projects targeted to be completed this year. Approximately 95% of TRP.CN’s EBITDA stems from regulated assets or those with long-term contracts, which helps insulate the company from the current volatility in energy markets.

Enbridge Inc (ENB.CN) reported 2Q results ahead of analyst expectations and reiterated prior financial guidance for the year, highlighting strong contracts and a quality customer base with 95% investment-grade rated. ENB has $11 billion of projects underway. [3]

Product Details

The Alerian Midstream Energy Dividend UCITS ETF (MMLP) is a UCITS compliant Exchange Traded Fund domiciled in Ireland. Due to list in July and August.

The fund seeks to provide 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 markets 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.

Please remember that the value of your investment may go down as well as up and past performance is no indication of future performance.

• MMLP Factsheet 
• MMLP Fund Page
• MMLP Points of Difference versus UK-Listed ETPs
• MMLP Points of Difference versus US-listed ETPs

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