Midstream Energy Monthly Report | August
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 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
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
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
*July figure based on 31.07.20
What Has Driven This
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
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
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.
Products Partners (EPD) announced 2Q results on July 29,  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.  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.
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. 
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.
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.
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.
remember that the value of your investment may go down as well as up and past
performance is no indication of future performance.
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