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.
The index is down -19.90% over the last 12 months.
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. 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
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
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
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.
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%
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.