Midstream Energy Monthly Report | October

• 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 with significant free cash flow potential, benefiting our Midstream Energy ETF.
• The current yield for the underlying index for The Alerian Midstream Energy Dividend UCITS ETF (MMLP), AEDW, is just over 12% reflecting ongoing weakness in energy equities. Importantly, as of 30 September, 84.5% of the index was investment-grade companies by weighting.
• Year-to-date through September, AEDW has outperformed broader energy, represented by the Energy Select Sector Index (IXETR), supported by stable fee-based cash flows and generous income.

Performance Review

• September: AEDW -11.19% 
• WTI oil prices fell 5.61% in September and are down 34.13% YTD through September 30.

Yield

The current yield for AEDW is 12.38%*, which is elevated relative to the five-year average of 7.50%. 

*as of 30.09.20 Source of all data: Alerian, Bloomberg

Alerian Midstream Energy Dividend Index Performance

Past performance is no guarantee of future performance.

Source: Alerian Based on net total return. September figures based on 31.08.20 – 30.09.20 12 Month figures based on 30.09.19 -30.09.20

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.

September figure based on 30.09.20 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 -40% on a net total return basis YTD through 30 September, but 2020 and 2021 EBITDA estimates for the index have fallen by only -6.7% and -10.7%, respectively, from January 31 (pre-COVID) to the end of September. 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 30 September, 84.5% of AEDW was investment-grade companies by weighting, and the index was trading at 8.8x 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 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 September and by over 800 basis points on a year-to-date basis.

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

Total Return NAV to Date (up to 30/09/2020)

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 30/09/20

Industry News

Framing the current yields within midstream.

Midstream energy infrastructure stands out among income-oriented investments for its generous yields, which are currently elevated relative to history as other sectors offer yields below their historical norms. As of 30 September, the AEDW Index was yielding 12.38% compared to its five-year average of 7.50%. With yields at these levels, there are important points for investors to keep in mind:

• As of 30 September, the AEDW index consisted of 84.47% investment-grade companies by weighting.
• For second quarter dividends announced in July and August, there were no dividend cuts among AEDW constituents.
• Companies remain well positioned to afford their payouts. Large companies are benefiting from scale, diversification, and a strong customer base. Smaller names cut their dividends back in April to preserve their balance sheets and enhance financial flexibility, making their current payouts much more affordable.
• Even energy blue chip Exxon (XOM) is currently yielding 10.14% 560 basis points above its five-year average.

Today’s high yield stream in midst are not indicative of distressed companies but rather reflect the ongoing weakness in energy equities that has been driven by macro volatility and negative sentiment. With yield becoming more scarce, midstream energy infrastructure represents a unique opportunity to receive attractive income from quality companies with resilient cash flows trading at steep discounts to history.

Outlook

Despite broader market and energy headwinds in September, midstream offers exposure to the ongoing energy recovery while also providing generous income. Furthermore, if volatility in oil markets persists, midstream is well positioned to perform defensively relative to other energy sectors as shown in September. The combination of steady cash flows and moderating growth capital spending are setting the stage for meaningful free cash flow generation in excess of dividends for many midstream names in 2021 providing a potential tailwind for the space. As energy broadly pursues free cash flow to attract generalist investors, the greater predictability of midstream cash flows allows for a higher degree of confidence in free cash flow generation, regardless of the commodity price environment. Relative to other income-oriented investments and the broader market, midstream companies are offering elevated yields and significant valuation discounts relative to history with a compelling free cash flow potential as well.

Constituent News

Energy Transfer (ET) completed its Lone Star Express Pipeline Expansion, which can transport more than 400,000 barrels per day of natural gas liquids (NGLs) from the Permian to ET’s Lone Star system.[1] The pipeline network feeds into ET’s facilities at the Mont Belvieu NGL hub, which include NGL processing and storage infrastructure. The pipeline was completed ahead of schedule and on budget. NGLs have been a relative bright spot in energy this year benefitting from steadier demand, including from export markets, and a constructive outlook for growing NGL production from the US in 2020 and 2021. Read more.

Enterprise Products Partners (EPD) has cancelled its Midland-to-ECHO-4 crude pipeline from the Permian.[2]  Instead of adding this new capacity, EPD amended agreements with some of its customers to use existing pipelines to meet oil transportation needs. The project cancellation reflects capital discipline and reduces growth capital spending for 2020-2022 by $800 million. With more moderate capital spending and expectations for stable cash flows, EPD is one of several names in the midstream space that is expected to generate free cash flow after dividends in 2021 based on current consensus estimates. Read more.

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 Midstream Energy ETF 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

Click here to download Midstream Energy Monthly Report.