Midstream Energy Monthly Report | September
- A disconnect between equity price performance
and the fundamental outlook for midstream has created an opportunity for
investors to reap attractive income from quality companies trading at
discounted valuations relative to history.
- The current yield for the underlying index
for The Alerian Midstream Energy Dividend UCITS ETF (MMLP), AEDW, is more than 350 basis points above the five-year average,
marking a significant contrast with other income-oriented investments offering
yields near or below historical norms.
- Year-to-date through August, AEDW has
outperformed broader energy, represented by the Energy Select Sector Index, supported
by stable fee-based cash flows and generous income.
- August: AEDW 2.11%
- WTI oil prices rose 5.81% in August but are down -30.22% YTD through August
The current yield for AEDW is 11.01%*,
which is elevated relative to the five-year average of 7.42%.
*as of 31.08.20. Source of all data: Alerian, Bloomberg
Alerian Midstream Energy Dividend Index Performance
Past performance is no guarantee of future performance.
Source: Alerian *August figures based on
31.07.20 – 31.08.20
**12 Month figures based
on 31.08.19 -31.08.20. Based on net total
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
*August figure based on 31.08.20
What has driven this performance?
Despite the fee-based nature
of midstream and stable earnings outlooks even after oil’s collapse, energy
infrastructure companies have been caught up in the wave of negative sentiment
surrounding energy in the wake of COVID-19 demand headwinds and resulting oil
price volatility. The AEDW Index is down almost 32% on a net total return basis
YTD through August 31, but 2020 and 2021 EBITDA estimates for the index have
fallen by less than 12% from January 31 (pre-COVID) to mid-August. This
disconnect between performance and the fundamental outlook has created an
opportunity for investors to reap attractive income from quality companies
trading at notable discounts to historical valuations. As of 31 August, 83.7%
of AEDW was investment-grade companies by weighting, and the index was trading
at 9.3x consensus 2021 EBITDA estimates compared to a historical (ten-year)
EV/EBITDA average multiple for midstream of ~12x.
Relative to broader energy,
midstream energy infrastructure, including our midstream energy ETF, has performed well, supported by more stable
cash flows and generous income. The underlying index for our midstream energy ETF has outperformed
broader energy’s total return, represented by the Energy Select Sector Index
(IXETR), by over 300 basis points for the month of August and by over 680 basis
points on a year-to-date basis.
Current/ past performance is no guarantee of future performance.
Alerian Midstream Energy Dividend Index (NTR) and MLP ETF Performance
Total Return NAV to Date (up to 31/08/2020)
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 31/08/20
Steady midstream EBITDA outlooks contrast
with performance. The strength of the midstream
business model is apparent in the companies maintaining or raising guidance, with
2Q results noticeably outnumbering those lowering expectations. Despite the
volatility in oil prices this year, 2020 and 2021 EBITDA estimate revisions for
midstream have been resilient in contrast to other sectors of energy because of
its fee-based business model and contract protections such as minimum volume
commitments. From January 31 (pre-COVID and oil’s collapse) to mid-August, 2020
and 2021 EBITDA estimates for AEDW have only fallen 8.0% and 11.2%
respectively, compared to 60+% downward revisions for exploration and production
companies and 34+% declines for broader energy . The stability in the outlook for midstream EBITDA in 2020 and
2021 contrasts starkly with the weak performance in midstream equities this
year. The disconnect between performance and fundamentals suggests opportunity for
improvement as midstream companies remain financially disciplined and execute
consistently. Of the 31 constituents in AEDW, 16 maintained or raised prior 2020
financial guidance with their 2Q results representing approximately 40% of the
index based on weightings from mid-July. By comparison, five names which
represent 23% of the index, lowered guidance, including two names that lowered
guidance by a mere 1%. The balance of constituents does not provide financial
Elevated yields persist, but payouts
remain steady. At the end of August, AEDW was
yielding more than 350 basis points above its five-year average, striking a
contrast with other income-oriented investments, such as REITS and Utilities,
offering yields near or below historical norms. Despite elevated yields for
midstream, 2Q dividends announced in July and August were all steady, with one
constituent raising its distribution. Index constituents are overall well
positioned to afford their dividends. Looking at payout ratios based on
operating cash flow, the 2Q index average was in line with 2019 metrics despite
the challenging macro environment in 2Q, and 15 of 31 constituents had payout
ratios of 60% or less for 2Q.
As the recovery in energy
continues, midstream energy infrastructure offers leverage to ongoing
improvements while also providing generous income. Furthermore, if volatility
returns, midstream is well positioned to perform defensively relative to other
energy sectors. Steady dividends for 2Q and resilient earnings expectations
mark a contrast with other sectors of energy, particularly as in August BP
became the latest European integrated energy company to cut its dividend. Compared
to other income-oriented investments and the broader market, midstream
companies are offering elevated yields and significant valuation discounts
relative to history.
(MPLX) reported 2Q results that exceeded consensus expectations on
strength in Logistics and Storage volumes. MPLX highlighted its
focus on financial discipline and reiterated its goal to achieve free cash flow
after distributions in 2021. The partnership also announced a joint venture
with privately-owned WhiteWater Midstream and West Texas Gas to provide NGL
takeaway capacity from the Permian Basin. The joint venture will utilize
existing infrastructure to maximize capital efficiency.
Williams Companies (WMB) announced a goal of reducing greenhouse
gas emissions by 56% from 2005 levels by 2030 as the company targets net zero
carbon emissions by 2050. WMB is investing $400 million in solar projects to
power company facilities in nine states.
As WMB exemplifies, ESG and midstream can go hand in hand, and
alternative energy can create opportunities for midstream companies. WMB is one
of more than a dozen MMLP holdings with sustainability reports.
Morgan (KMI) has brought the final unit at its Elba
Island liquefaction facility online. The now complete liquefied natural gas
(LNG) export facility has the capacity to export 2.5 million tonnes of LNG
annually and is supported by a 20-year offtake agreement with Shell. Exports
broadly have created opportunities for energy infrastructure companies, with
LNG exports from the US seeing significant growth in recent years as projects
have been brought into service.
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, the midstream energy ETF 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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