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Midstream energy sector is well poised to benefit from the Covid-19 vaccine-fuelled rise in oil prices and energy share valuations

The midstream energy sector is well poised to benefit from the Covid-19 vaccine-fuelled increase in oil and energy valuations says Alerian’s Director of Research.

The Midstream ETF has delivered strong returns in recent weeks and is well positioned to benefit from the positive impact on oil and the wider energy sector from the global Covid-19 vaccination programme and the implications this has for economic growth. When you trade ETFs your capital is at risk. Past performance is no guarantee of future performance.

The ETF tracks the Alerian Midstream Energy Dividend Index (AEDWN), which is comprised of North American midstream energy infrastructure companies, including C-corporations and MLPs (Master Limited Partnerships), that generate fees by transporting, processing and storing oil, natural gas and natural gas liquids, in turn driving stable cash flows. The midstream sector has attracted investors due to its high income-yield characteristics, particularly among MLPs.

Since the 1st of November, AEDWN has jumped 31.16% on a net total return basis, as vaccine breakthroughs and the production cut announcement from Saudi Arabia in early January have supported oil prices and energy equities[1]. The index is down -19.90% over the last 12 months[2]. The current yield for the underlying index for the Midstream ETF (MMLP) is 8.64% or over 100 basis points above its five-year average[3]. Importantly, as of 31st December 2020, companies with investment grade credit ratings represented 83.4% of the index by weighting.  Past performance is no guarantee of future performance. 

The fee-based nature of midstream businesses and the corresponding stable cash flows differentiate midstream companies from the rest of the energy complex. AEDWN has outperformed the broader energy sector, represented by the Energy Select Sector Index (IXETR), by almost 300 basis points over the last twelve months on a total-return basis[4]. 

While navigating the pandemic, ESG considerations have remained a focus for midstream with seven more constituents of AEDWN publishing their inaugural sustainability reports since August, bringing the total number of constituents with sustainability reports to 21 out of 32.  Over this same timeframe, two constituents have announced targets to achieve net-zero carbon emissions by 2050. These developments reinforce that ESG investing can encompass midstream investing as companies continue to enhance reporting and make progress with ESG initiatives.

 

Stacey Morris, Director of Research at Alerian and the Alerian Midstream ETF (MMLP) said: “The recent strong midstream performance has coincided with improving commodity prices, a reflation trade, and progress with COVID-19 vaccinations. Looking ahead to the rest of 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, and a successful vaccine roll-out would be constructive for a recovery in oil demand this year. 

“Specific to midstream, companies are well positioned to generate meaningful free cash flow this year, with many names expected to have excess cash even after making generous dividend payments. To this end, several companies initiated buyback programs in late 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.”

US-based Alerian is the world leader in North American energy infrastructure indexing and research, pioneering how the MLP asset class is measured and creating the most widely used real-time benchmark for midstream MLPs – the Alerian MLP Index (AMZ). As of 31 December, Alerian had a 74.7% AuM market share for US-listed passive MLP exchange traded products.

With a historic 5-year average yield of 7.62%[5] for the Alerian Midstream Energy Dividend Index, which the Midstream ETF tracks, midstream energy infrastructure compares favourably to infrastructure and energy assets as well as other income strategies while often performing more defensively during periods of energy price declines. The current yield of the Alerian Midstream Energy Dividend Index was 8.64% as of 22.01.2021. This compares favourably to the FTSE 100 TR Index which has a current yield of 3.72%. 

Past performance is no guarantee of future performance. When you trade ETFs, your capital is at risk. 

 

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