- Midstream companies continue to make positive
progress on ESG initiatives and are taking steps to position themselves to
capitalize on opportunities related to the energy transition.
- Financial guidance for 2021 from some of the
larger names in AEDW is mostly positive or stable. Stable cash flows are
helping contribute to significant free cash flow generation after dividends in
2021, which will be used for leverage reductions and buybacks.
- At the end of March, the underlying index for
the Midstream energy ETF (MMLP), AEDW, was yielding 7.97%.
Notably, investment-grade companies represented 82.2% of the index by
Midstream Energy Dividend Index (AEDW)
performance is no guarantee
of future performance.
*12-month figures based on 31.03.20
Index yield annualizes the most recent dividend announcement for each
constituent and takes into account current index weightings.
- March: AEDW 8.17%
- WTI oil prices fell 3.80% in March
The current yield for AEDW is 7.97%*, which is elevated relative
to the five-year average of 7.58%.
What has driven this performance?
Although oil prices saw a modest pullback for the month,
midstream energy infrastructure gained 8.16% in March. Gains were largely
biased to the start of the month when energy rallied broadly as oil prices hit
new relative highs before slipping in the second half of the month. Notably,
AEDW outperformed both the Energy Select Sector Index (IXE) and the Stoxx
Europe 600 Oil and Gas Index (SXEP), which were up 2.81% and 3.69%,
respectively, on a total-return basis for the month.
Even with sizable gains since November, AEDW was trading at 9.95x
consensus 2022 EBITDA estimates at the end of March compared to a historical
(ten-year) average EV/EBITDA multiple for midstream of ~12x.
Current/past performance is no guarantee of
*as of 31.3.21
all data: Alerian, Bloomberg
MMLP Performance Table
As of 31.03.21
Alerian Midstream Energy Dividend UCITS ETF
Alerian Midstream Energy Dividend Index (NTR)
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 31/03/2021.
Financial Guidance for Midstream Largely Steady.
Past performance is no guarantee
of future performance. Source of all data: Alerian, Company Reports as of 31
Due to its fee-based business
model, midstream is uniquely positioned among energy companies to provide
forward financial guidance. While not all AEDW constituents provide EBITDA
guidance, the names in the table above reflect a positive or steady outlook for
2021. Notably, some of the top names in AEDW by weighting are anticipating
year-over-year growth, with Enbridge (ENB) and ONEOK (OKE)
standing out for expected sequential EBITDA growth of 6.2% and 12.0%,
respectively. While severe winter weather in the first quarter could have a
negative impact on some companies, this could be offset by what has likely been
a stronger macro environment so far in 2021. For example, Crestwood Equity
Partners (CEQP) has already raised 2021 guidance from initial projections,
and additional upward revisions may be possible for other AEDW constituents (read more). More broadly,
steady cash flows help support the significant free cash flow generation
anticipated for many names this year, which can be used for leverage reductions
Midstream companies make progress on ESG and energy
Kinder Morgan (KMI) announced the formation of a
new internal group focused on commercial opportunities stemming from the energy
transition. The Energy Transition Ventures Group will look to expand KMI’s role
beyond those low-carbon initiatives already underway and may consider new
opportunities such as renewable natural gas capture, production of hydrogen,
renewable power generation, and renewable diesel production.
Partners (EPD) entered into a power purchase
agreement with EDF Renewables which supports
EPD’s goal to source 25% of its power from renewables by 2025. During its
inaugural ESG Day in March, EPD laid out its approach towards sustainability,
defined how ESG factors are embedded into their operations, decision making,
and culture, and provided a fundamental outlook on various ESG topics.
Gibson Energy Inc. (GEI CN) expanded its ESG initiatives by establishing measurable targets addressing environmental and social challenges and announcing
the intention to enhance its regulatory framework to improve disclosure transparency
and better track the progress against its enhanced
ESG targets. GEI also announced a biofuels blending project at its Edmonton Terminal, which will be a key component of GEI’s plans for at
least half of 2021 growth capital spending to be ESG positive.
The Midstream energy ETF clearly stands to benefit from a stabilizing energy landscape and expectations
for improvements in the global economy and oil demand as vaccine deployment
continues. The energy sector, including midstream, has rebounded on the heels
of 20+% gains in oil prices this year through March, as well as tailwinds from
the reflation trade and rotation into value. Relative to the rest of energy,
midstream energy infrastructure stands out for its attractive income, free cash
flow potential, and buybacks. Midstream yields near 8% remain compelling with
recent dividend increases and guidance for growth reinforcing the favourable
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 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 (read more). Finally, the Midstream energy ETF continues to trade at a discount to historical valuations. In summation, midstream
energy infrastructure is well positioned to provide attractive income to
investors with the potential for total return as well.