Midstream Energy Monthly Report | February

• At the end of January, the underlying index for our midstream energy ETF, AEDW, was yielding 8.98%.
•  Constituents announcing dividends thus far have either maintained or modestly increased payouts adding confidence to the yield, which is more than 130 basis points above the five-year average.
• Midstream earnings season began in mid-January and will continue through February, with initial fourth quarter results exceeding expectations.
• In addition to a risk-off trade, regulatory headlines in the second half of January pressured midstream, though there is no real substantial impact to the space, creating a buying opportunity.
• In January, AEDW outperformed both the Energy Select Sector Index (IXE) and Stoxx 600 Oil and Gas Index (SXEP).

Alerian Midstream Energy Dividend Index (AEDW)

Performance

Dividend Yield

Past performance is no guarantee of future performance. Source: Alerian *12-month figures based on 31.01.20 – 31.01.21 Index yield annualizes the most recent dividend announcement for each constituent and takes into account current index weightings.

Performance Review

• January: AEDW 5.73%
• WTI oil prices increased 7.58% in January. 

Yield

The current yield for AEDW is 8.98%*, which is elevated relative to the five-year average of 7.62%.

 What has driven this performance?

Midstream started the month strong as oil prices gained on news of additional production cuts from Saudi Arabia, and a reflation trade emerged following the Georgia run-off results, which were perceived to pave the way for more meaningful stimulus spending. As President Biden took office, regulatory headlines reversed the rally and pressured energy, including midstream, despite no substantial readthrough for midstream from policy announcements so far (read more below).

Notably, AEDW outperformed both the Energy Select Sector Index (IXE) and the Stoxx Europe 600 Oil and Gas Index (SXEP), which were up just 3.78% and 1.40%, respectively, on a total-return basis for the month of January.

Even with sizable gains since November, AEDW was trading at 9.37x consensus 2022 EBITDA estimates compared to a historical (ten-year) average EV/EBITDA multiple for midstream of ~12x.

Current/past performance is no guarantee of future performance *as of 31.1.21

MMLP Performance Table

As of 31.01.21

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 31/01/2021.

Industry News

Regulatory news puts undue pressure on midstream equities creating buying opportunity.

As President Biden took office, regulatory concerns caused the reflation trade that had boosted energy to temporarily reverse. The well-telegraphed cancellation of the permit for the Keystone XL pipeline should have come as little surprise. TC Energy (TRP CN), the project owner, suspended activity on the crude pipeline that would have carried barrels from Canada to the US but reiterated past guidance for dividend growth, highlighting a $25 billion project backlog even without Keystone XL. The uniqueness of the pipeline (cross border pipelines require presidential permits), and given that midstream ownership is limited to TC Energy, there is no real impact to the rest of midstream from the cancelled permit for Keystone XL. Despite this, news seemed to weigh on the midstream space, even as TRP CN shares were essentially flat for the week of the announcement.

President Biden also signed an executive order on 27 January pausing new leases for drilling on federal lands and offshore waters to allow for a review of current leasing and permitting practices.[1] Importantly, the order does not impact ongoing operations or permits for existing leases. Producers stockpiled permits ahead of President Biden taking office, and some companies have discussed having an inventory of federal permits to support more than four years of drilling – in other words, longer than the president’s term. In fact, the industry has 7,700 unused permits for drilling on federal lands and waters.[2] Even if the pause on new leases persists, there should be little medium-term impact to the industry, including midstream companies providing pipeline services for production from federal lands.

With AEDWN having gained 36.45% from November 2 to January 15, the pullback of -8.03% in the second half of the month has created a buying opportunity for those interested in allocating to midstream but concerned that they had missed some of the upside in shares.[3] The regulations from the Biden Administration should have been expected and have very little impact to the midstream space, making the equity response feel overdone. Read More

Constituent News

Williams (WMB) hosted its Inaugural Virtual ESG Event to discuss the progress it has made in its sustainability efforts since 2019. WMB, which handles 30% of US natural gas, highlighted the long-term importance of the hydrocarbon to the global energy transition and the emphasis the company places on safety in its existing pipeline operations. Additionally, management reiterated its commitment to climate consciousness, which includes a net zero emissions target by 2050 and capitalizing on opportunities in the renewable energy space. WMB is one of several large energy infrastructure companies progressing with ESG initiatives.[4] Read More

TC Energy (TRP) suspended development of the Keystone XL pipeline as the Biden administration revoked the presidential permit for the project. Importantly, TRP restated dividend growth guidance of 8-10% for 2021 and 5-7% beyond 2021, and the company still has a project backlog of $25 billion without Keystone XL. With TRP the sole owner of the project within midstream and given the unique circumstances of the project, the cancellation has no real impact to broader midstream.[5]

Kinder Morgan’s (KMI) 2021 Investor Day highlighted the company's current positioning and stable long-term outlook. KMI expects to generate roughly $800 million of free cash flow after its dividend this year. KMI projects a 3% year-over-year dividend increase and $450 million available for share buybacks in 2021. ESG was also in focus. Natural gas is anticipated to play a significant role in the global economy over the next several decades, but management also identified several opportunities in renewable natural gas and hydrogen, for example, that leverage its existing asset base.[6]

Outlook

Entering 2021, energy, including midstream energy infrastructure, clearly stands to benefit from an improved outlook for the global economy and oil demand. Other market undercurrents such as a rotation into value or a reflation trade driven by inflation concerns should also be supportive for energy infrastructure. Midstream earnings season kicked off in mid-January and will continue through February, with initial fourth quarter results exceeding expectations. Dividend announcements are also underway, with the AEDW constituents having announced so far either maintaining or modestly growing their payouts.   Midstream companies are poised 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. Approximately half of AEDW by weighting has buyback authorizations in place. Midstream energy infrastructure is well positioned to provide attractive income to investors with the potential for total return as well.

Product Details

The Alerian Midstream Energy ETF (MMLP) is a UCITS compliant Exchange Traded Fund domiciled in Ireland.

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.

Visit the MMLP Fund Page for more information.