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.
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.
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.
- September: AEDW -11.19%
- WTI oil prices fell 5.61% in September and are down 34.13% YTD through September
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.
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
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
September figure based
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)
Alerian Midstream Energy Dividend UCITS ETF
Alerian Midstream Energy Dividend Index (NTR)
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
Framing the current yields within
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
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.
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. 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.
Products Partners (EPD) has cancelled its Midland-to-ECHO-4 crude
pipeline from the Permian. 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.
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.
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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