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Midstream Energy Monthly Report | January

 

  • After a strong November, the Alerian Midstream Energy Dividend Index (AEDW) rose 0.56% in December on a net total return basis. 
  • The current yield for the underlying index for The Alerian Midstream Energy Dividend UCITS ETF (MMLP), our midstream energy ETF, is 9.59% or almost 200 basis points above its five-year average. As of 31 December, 83.4% of the index by weighting was investment-grade companies. 
  • Unlike other energy sectors, midstream companies often provide financial guidance for the year ahead. Midstream guidance updates thus far have largely reflected stability, with some names expecting modest sequential growth in EBITDA in 2021.

 

Performance Review

  • December: AEDW 0.56%
  • WTI oil prices increased 7.01% in December but finished the year down 20.54%.

 

Yield

The current yield for AEDW is 9.59%*, which is elevated relative to the five-year average of 7.64%. 

 

Alerian Midstream Energy Dividend Index Performance

December

12 Month

0.56%

-26.40%

Past performance is no guarantee of future performance.

Source: Alerian Based on net total return. December figures based on 30.11.20 – 31.12.20 12-month figures based on 31.12.19 – 31.12.20

 

Dividend Yield



December

AEDW

9.59%

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. December figure based on 31.12.20 Source: Alerian

 

 

What has driven this performance?

After a strong November, energy, including midstream, saw more muted gains in December as investors weighed the impact of a new COVID-19 variant and heightened lockdowns in many places.

The fee-based nature of midstream and stable cash flows continue to differentiate midstream from the rest of energy. The AEDW Index finished 2020 down -26.40% on a net total return basis, but 2020 and 2021 EBITDA estimates for the index have fallen by only -10.2% and -14.3%, respectively, from January 31 (pre-COVID) to the end of December. 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 December, 83.4% of AEDW was investment-grade companies by weighting, and the index was trading at 9.1x consensus 2022 EBITDA estimates compared to a historical (ten-year) EV/EBITDA average multiple for midstream of ~12x.

While the broader energy sector, represented by the Energy Select Sector Index (IXETR), outperformed the underlying index for midstream energy ETF during December, AEDW outperformed IXETR by over 600 basis points in 2020 on a total-return basis.

Current/past performance is no guarantee of future performance *as of 31.12.20

Source of all data: Alerian, Bloomberg

 

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

Total Return NAV to Date (up to 31/12/2020)

 

1M

3M

6M

YTD

12M

Since Inception

Alerian Midstream Energy Dividend UCITS ETF

-1.08%

20.13%

-

9.43%

-

9.43%

Alerian Midstream Energy Dividend Index (NTR)

0.56%

21.60%

9.16%

-26.40%

-26.40%

10.81%

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 31/12/20

 

Industry News

2021 guidance updates reflect stability

Into year-end 2020, several midstream companies provided financial guidance for 2021. Unlike other sectors of energy, midstream companies are often able to provide EBITDA guidance for the year ahead given the fee-based nature of cash flows and contract protections such as minimum volume commitments. As discussed in more detail below, guidance updates have reflected the stability of these underlying businesses, with a couple names projecting modest sequential EBITDA growth in 2021.

Free cash flow remains in focus

The energy sector broadly is pursuing free cash flow to attract generalist investors and in response to investor desires to see debt reduced and more cash returned to shareholders. Within the energy space, midstream is better positioned to generate free cash flow independent of the commodity price environment due to the fee-based nature of these businesses (read more). Steady cash flows and significant reductions to growth capital spending plans for most midstream names are laying the groundwork for meaningful free cash flow generation in 2021. While some companies will use excess cash to reduce debt, others have announced buyback authorizations to return cash to shareholders. Based on weightings from the October reconstitution, over 50% of the AEDW Index by weighting have buyback authorizations in place. Discounted valuations, free cash flow expectations, and the potential for buybacks make for a compelling total return opportunity complemented by the generous income on offer.

 

Outlook

Entering 2021, energy, including midstream energy infrastructure, clearly stands to benefit from an improved outlook for the global economy and oil demand. Energy has been one of the sectors most negatively impacted by the pandemic. The widespread deployment of vaccines would be constructive for a recovery in oil demand. While distribution of vaccines to the general public will take time, stocks will likely trade in anticipation of this trend just as the space rallied on vaccine development news in November, which exemplified the potential upside for the sector. With West Texas Intermediate oil prices currently around $48 per barrel, the recovery remains in early stages with plenty of room for additional improvement in oil prices and energy equities. Furthermore, any shift from growth to value could also be broadly supportive for energy. Specific to midstream, companies are well positioned to generate meaningful free cash flow in 2021, with many names expected to have excess cash even after making generous dividend payments. To this end, several companies initiated buyback programs in 2020, which could be an added tailwind for midstream equities in 2021. Midstream energy infrastructure is well positioned to provide attractive income to investors with the potential for total return as well.

 

Constituent News

Enbridge Inc. (ENB CN) announced 2021 EBITDA guidance of $14.1 billion at the midpoint, which is up roughly 3% from 2020 expected EBITDA of slightly less than $13.7 billion. ENB also announced a 2021 dividend increase of 3.1%.[1]

Kinder Morgan (KMI) announced 2021 financial guidance and expectations for the 2021 dividend. KMI expects the annualized 2021 dividend to be $1.08 per share, representing a 3% increase from 2020, and KMI noted the potential for opportunistic share buybacks of up to $450 million in 2021. Adjusted EBITDA guidance for 2021 of $6.8 billion represents a modest decline from 2020 guidance of less than 3%. The 2021 capital budget of $800 million is down just over 50% from 2020 spending guidance.[2]  

Pembina Pipeline (PPL CN) provided several updates in mid-December. The company announced plans to pursue a buyback authorization for up to 5% of its shares outstanding. PPL guided to 2021 EBITDA of $3.3 billion at the midpoint, which represents a 2% increase from EBITDA guidance for 2020. The company announced a 2021 capital budget of $785 million, which is expected to be fully covered by operating cash flow after dividends if the company achieves the bottom of its guidance range.[3]

 

 

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%

 

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