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Midstream Energy Monthly Report | April

  • 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 weighting.

 

Alerian Midstream Energy Dividend Index (AEDW)

 

Performance

February

12 Month*

8.17%

79.09%

 

Dividend Yield

March

AEDW

7.97%

Past performance is no guarantee of future performance.

Source: Alerian *12-month figures based on 31.03.20 – 31.03.21 Index yield annualizes the most recent dividend announcement for each constituent and takes into account current index weightings.

 

Performance Review

  • March: AEDW 8.17%   
  • WTI oil prices fell 3.80% in March

 

Yield

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 future performance *as of 31.3.21

Source of all data: Alerian, Bloomberg

 

MMLP Performance Table

As of 31.03.21

 

 

1M

3M

6M

YTD

12M

SI

Alerian Midstream Energy Dividend UCITS ETF

6.43%

19.23%

43.24%

19.23%

-

27.57%

Alerian Midstream Energy Dividend Index (NTR)

8.16%

20.80%

46.89%

20.8%

79.08%

33.85%

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.

 

Industry News

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 March 2021

 

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 and buybacks.

 

Constituent News

Midstream companies make progress on ESG and energy transition initiatives.

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.

Enterprise Products 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.

 

Outlook

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.

 

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