- 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
October
|
12 Month
|
1.30%
|
-35.78%
|
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)
|
1M
|
3M
|
6M
|
YTD
|
12M
|
Since Inception
|
Alerian Midstream Energy Dividend UCITS ETF
|
1.5%
|
-10.29%
|
-
|
-9.60%
|
-
|
-9.60%
|
Alerian Midstream Energy Dividend Index (NTR)
|
1.30%
|
-8.14%
|
-8.79%
|
-38.69%
|
-35.78%
|
-7.69%
|
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.
Exchange |
Bloomberg Code |
RIC |
ISIN |
SEDOL |
Currency |
TER |
London Stock Exchange |
MMLP LN
|
MMLP.L
|
IE00BKPTXQ89
|
BMVFZ02
|
USD
|
0.40%
|
London Stock Exchange
|
PMLP LN
|
PMLP.L
|
IE00BKPTXQ89
|
BL96TT7
|
GBP
|
0.40%
|
Borsa Italiana
|
MMLP IM
|
MMLP.MI
|
IE00BKPTXQ89
|
BMHVZQ0
|
EUR
|
0.40%
|
Deutsche Boerse Xetra
|
JMLP GY
|
JMLP.DE
|
IE00BKPTXQ89
|
BMHVZP9
|
EUR
|
0.40%
|
Download our Midstream Energy monthly report here.