Midstream Energy Monthly Report | March

• At the end of February, the underlying index for the Alerian Midstream Energy ETF (MMLP), AEDW, was yielding 8.59%. Notably, investment-grade companies represented 83.0% of the index by weighting.
• AEDW constituents largely maintained their recent dividends at prior levels, but some of the largest names in the index by weighting announced increases, including three of the top ten constituents by weighting. Increases and positive guidance help add confidence to midstream income even as yields remain above the five-year average.

   

• The announcements of a natural gas pipeline asset sale at an attractive multiple and a takeout offer for an AEDW constituent at a premium helped highlight the value proposition of the midstream space.

   

Alerian Midstream Energy Dividend Index (AEDW)

Performance

Dividend Yield 

Past performance is no guarantee of future performance.

Source: Alerian *12-month figures based on 29.02.20 – 28.02.21 Index yield annualizes the most recent dividend announcement for each constituent and takes into account current index weightings.

Performance Review

• February: AEDW 5.63%
• WTI oil prices increased 17.82% in February.

   

Yield

The current yield for AEDW is 8.59%*, which is elevated relative to the five-year average of 7.59%.

What has driven this performance?

Midstream energy ETF gained in February as companies announced 4Q results, dividends, and forward financial guidance. Oil prices saw a strong rebound as weather-related supply disruptions in the US added to existing OPEC+ cuts and an incremental 1 million barrel per day cut from Saudi Arabia (for February and March) to tighten the market. Energy equities, including midstream, also benefitted from the continuing reflation trade, which remains in focus given positive expectations for economic growth and ongoing inflation concerns with bond yields rising.

AEDW performed relatively in line with the Stoxx Europe 600 Oil and Gas Index (SXEP), which was up 6.16%, on a total-return basis for the month of February.

Even with sizable gains since November, AEDW was trading at 9.57x consensus 2022 EBITDA estimates compared to a historical (ten-year) average EV/EBITDA multiple for midstream of ~12x.

Past performance is no guarantee of future performance

*Source of all data: Alerian/ Bloomberg. Data as of 28.2.21.

MMLP Performance Table As of 28.02.21

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, HANetf. Data as of 28/02/2021.

Industry News

Dividends steady with some large names providing growth. 

For illustrative purposes only. Past performance is no guarantee of future performance.

AEDW constituents largely maintained their payouts for 4Q20 (those dividends paid in 1Q21 based on 4Q20 performance), with some of the largest names in the index by weighting announcing growth. Three of the top ten constituents announced dividend increases – Enterprise Products Partners (EPD) by 1.1%, Enbridge (ENB CN) by 3.1%, and Williams (WMB) by 2.5%. A few constituents have declared or announced plans to increase their dividends for 1Q21. TC Energy (TRP CN) declared a 1Q21 dividend of $0.87 per share payable in April, representing a 7.4% increase. Similarly, Gibson Energy (GEI CN) announced a 2.9% increase for its 1Q21 dividend. Kinder Morgan (KMI) plans to increase its dividend by 3% for 2021 while also targeting buybacks of up to $450 million. KMI and TRP are top ten constituents of AEDW by weighting. NGL Energy Partners (NGL), a 0.16% weight in AEDW, announced in early February that it was suspending its dividend and was the only cut for 4Q20. Antero Midstream (AM), a 2.1% weight in AEDW, announced plans to reduce its 2021 dividend to $0.90 per share annualized – a 27% reduction for 1Q21 – to internally fund organic growth projects and maintain a strong balance sheet. While there are some exceptions, recent dividend increases and largely positive guidance help add confidence to midstream income even as yields remain above the five-year average.

Source of all data: Alerian. Read more.

Constituent News

Asset sale and takeout offer help highlight value in midstream assets.

Kinder Morgan (KMI) and Brookfield Infrastructure Partners (BIP is not in AEDW) announced the sale of a 25% interest in Natural Gas Pipeline Company of America to ArcLight Capital Partners for $830 million[1], implying a 11.2x multiple to 2020 EBITDA. The 11.2x multiple for a minority stake in natural gas infrastructure helps highlight the long-term value of these assets. KMI was trading at 9.80x 2020 EBITDA as of February 28 and 9.90x 2022 EBITDA. The AEDW index was trading at 9.57x 2022 EBITDA estimates at the end of February with companies primarily focused on pipeline transportation of natural gas (similar to the assets being sold) representing 42.24% of the index by weighting. [1] https://ir.kindermorgan.com/news/news-details/2021/Kinder-Morgan-and-Brookfield-Infrastructure-Announce-Minority-Interest-Sale-in-Natural-Gas-Pipeline-Company-of-America-LLC/default.aspx

Inter Pipeline (IPL CN) received an unsolicited bid from Brookfield Infrastructure Partners (BIP, not in AEDW) in February.[2] IPL is a Canadian energy infrastructure company focused on oil sands transportation, NGL processing, conventional oil pipelines, and liquids storage. IPL is also constructing a major $4-billion petrochemical complex.  The offer price represented a 23% premium to the closing price of IPL shares prior to the announcement and a 28% premium to the 30-day volume-weighted average price.[3] Brookfield Infrastructure is IPL’s largest holder with a total economic interest of 19.6%. IPL has formed a special committee, which will review the offer. Broadly, the takeout offer at a notable premium helps highlight the continued value in midstream assets.

Outlook

After the severe demand destruction associated with COVID-19 in 2020, energy, including midstream energy infrastructure, clearly stands to benefit from an improved outlook for the global economy and oil demand as vaccine deployment continues. In the near-term, tightening oil supplies have boosted oil prices this year (WTI oil up over 25% YTD through February), which has helped make energy the best-performing sector this year. Furthermore, the reflation trade fuelled by expectations for economic growth and inflation concerns has also benefitted energy, including midstream. While midstream should benefit from these macro tailwinds, energy infrastructure stands out from the rest of the energy sector for its attractive income, free cash flow potential, and buybacks. Midstream yields remain attractive with recent dividend increases and guidance for growth highlighting the favorable outlook for income from this space. Regardless of the commodity price environment, midstream companies are poised to generate meaningful free cash flow in 2021, with many names expected to have excess cash, even after potential 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.

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