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.

Performance Review

• August: AEDW 2.11% 
• WTI oil prices rose 5.81% in August but are down -30.22% YTD through August 31. 

Yield

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

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 return.

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.

*August figure based on 31.08.20 Source: Alerian

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

Industry News 

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 [1]. 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 guidance.

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. 

Outlook

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.

Constituent News

MPLX (MPLX) reported 2Q results that exceeded consensus expectations on strength in Logistics and Storage volumes[2]. 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.

The 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[3].  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.

Kinder 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[4]. 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.

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, the midstream energy ETF 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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