Midstream Energy Monthly Report | November

• Looking ahead to 2021, 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, providing a potential tailwind for the space. 
• Despite weakness in equity markets broadly and pressure in the energy space, AEDW managed to end the month slightly higher, outperforming the Energy Select Sector Index (IXETR) by over 500 basis points in October.
• The current yield for the underlying index for MMLP, our midstream energy ETF, AEDW, is just over 11% reflecting ongoing weakness in energy equities. Importantly, as of 30 October, 84.6% of the index was investment-grade companies by weighting.

Performance Review

• October: AEDW 1.30%
• WTI oil prices fell 11.01% in October and are down 41.39% YTD through October 30.

Yield

The current yield for AEDW is 11.27%*, which is elevated relative to the five-year average of 7.58%. 

*as of 30.10.20

Alerian Midstream Energy Dividend Index Performance 

Past performance is no guarantee of future performance. Source: Alerian

Based on net total return. October figures based on 30.09.20 – 30.10.20 12-month figures based on 31.10.19 – 30.10.20

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.

October figure based on 30.10.20. Source: Alerian

What has driven this performance?

Despite weakness in equity markets broadly and pressure in the energy space in October, AEDW managed to end the month slightly higher. The fee-based nature of midstream and stable cash flows continued to differentiate midstream from the rest of energy. The AEDW Index is down almost -40% on a net total return basis YTD through 30 October, but 2020 and 2021 EBITDA estimates for the index have fallen by only -4.9% and -9.4%, respectively from January 31 (pre-COVID) to the end of October. 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 October, 84.6% of AEDW was investment-grade companies by weighting, and the index was trading at 8.9x 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 500 basis points for the month of October and by over 1,100 basis points on a year-to-date basis.

Current/past performance is no guarantee of future performance

Source of all data: Alerian, Bloomberg

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

Total Return NAV to Date (up to 30/10/2020)

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 30/10/20

Industry News

Dividends/distributions Update – As of October 30th, 25 of the 32 constituents in AEDW had announced dividends flat with the prior quarter, one name increased and four names have yet to report. Two constituents announced 50% cuts to their payouts: Energy Transfer (ET) at a 10.3% weight and NGL Energy Partners (NGL) at a 0.3% weight. (Index weightings are as of 16 October) Incorporating the cuts, the index yield at the end of October was still above 11%.

Buybacks in focus – With midstream yields elevated and free cash flow generation gaining traction, buybacks have been a common topic on earnings calls. Enterprise Products Partners (EPD) has repurchased $174 million or 8.3 million units this year[1]. This represents roughly 4% of cash flow from operations (CFFO) generated so far this year or a doubling from initial plans to spend 2% of CFFO on unit repurchases[2]. Magellan Midstream Partners (MMP) repurchased 1.4 million units for $50 million in 3Q, bringing 2020 repurchases to 5.0 million units for $252 million[3]. Targa Resources (TRGP) announced a $500 million share repurchase program in early October[4].

Renewables, ESG key topics on earnings calls – Renewables, the energy transition, and ESG have been more prominently discussed in management’s prepared remarks on 3Q earnings calls for energy infrastructure companies. MMP issued its first sustainability report on 30 October, bringing the total number of AEDW constituents with sustainability reports to 17 of 32 constituents. You can read the full report here.

Outlook

Despite oil price weakness and losses for equity markets broadly in October, midstream ended the month slightly higher. Third quarter results for energy infrastructure have largely exceeded expectations thus far with a handful of companies still to report in early November. Resolution in the US election, regardless of who wins, could help alleviate an overhang that has kept investors sidelined and weighed on energy, including midstream. November tends to see tax-loss selling, but with the steep sell-off earlier this year, perhaps tax-loss selling may be less of a factor towards year end. Looking ahead to 2021, 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 providing a potential tailwind for the space. Share repurchases are increasingly gaining traction, with more companies announcing buyback authorisations. Relative to other income-oriented investments and the broader market, midstream companies are offering elevated yields and significant valuation discounts relative to history with compelling free cash flow potential as well.

Constituent News

Enterprise Products Partners (EPD) exceeded 3Q consensus EBITDA expectations by 6%[5], demonstrating the advantages of a large, diversified business in a challenging environment. For the first time in conjunction with quarterly earnings, EPD provided an ESG summary update presentation.

Kinder Morgan (KMI) reported 3Q results that exceeded consensus expectations. In its 3Q release, KMI notably omitted past commentary around targeting a $1.25 per share dividend[6] (from $1.05 per share annualized currently) and instead mentioned dividend increases and/or share buybacks. Management explained on the call that they are looking at the best way to return excess cash to investors and want to retain flexibility given an 8%-plus yield.

TC Energy (TRP) offered to acquire all the outstanding units of related MLP TC PipeLines (TCP) not already owned by TRP in a stock-for-unit exchange[7]. The offer represented a 7.5% premium based on the 20-day VWAP for TRP shares and TCP units[8]. Consolidation between midstream C-Corp parents and their related MLPs has been common in recent years, with TRP/TCP providing the latest example.

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