Midstream Energy Monthly Report | June

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Key Takeaways

• An improving macro backdrop complemented strong earnings and helped set a constructive outlook for the space going forward as numerous guidance increases incorporated expectations of a stronger commodity environment.
• At the end of May, the underlying index for our Midstream Energy ETF (MMLP), AEDW, was yielding 7.21%. Notably, investment-grade companies represented 84% of the index by weighting.

Performance Review

Alerian Midstream Energy Dividend Index (AEDW)

Dividend Yield

Past performance is no guarantee of future performance. Source: Alerian *12-month figures based on 29.05.20 – 31.05.21

Index yield annualizes the most recent dividend announcement for each constituent and takes into account current index weightings.

• May: AEDW 5.46%
• WTI oil prices increased 4.31% in May.

Yield

The current yield for AEDW is 7.21%*, which is in line with the five-year average of 7.57%.

What has driven this performance?

Midstream energy infrastructure gained in May as a strong 1Q21 earnings season extended through the first half of the month and continued the trend of EBITDA beats and improved guidance set by the initial wave of earnings announcements in April. Numerous guidance increases also reflected an improving outlook for base businesses, setting a constructive tone for the remainder of 2021. Oil prices traded range-bound before breaking out to close the month at a one-year high on firm oil demand.[1] Both midstream and energy equities rode the wave of higher oil prices. The Energy Select Sector Index (IXE) gained 5.80% in May on a total-return basis, slightly outperforming AEDW’s 5.46% monthly increase. 

AEDW, the underlying index of our Midstream Energy ETF, significantly outperformed the Stoxx Europe 600 Oil and Gas Index (SXEP), which was up 1.97% on a total-return basis for the month of May. Even after eight consecutive months of positive performance, AEDW was trading at 10.2x consensus 2022 EBITDA estimates at the end of May compared to a historical (ten-year) average EV/EBITDA multiple for midstream of ~12.0x.

Current/past performance is no guarantee of future performance *as of 31.05.21 Source of all data: Alerian, Bloomberg.

MMLP Performance Table (As of 31.05.2021)

Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such a strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. 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 31/05/21.

Industry News

Midstream 1Q21 results were largely strong with winter storm impacts driving some rare billion-dollar EBITDA beats for the quarter while an improving macro backdrop also helped set a constructive outlook for the space going forward, with several management teams alluding to expectations of a stronger commodity environment in 2021 and 2022. Consistent with recent quarters, opportunities related to the energy transition and renewables were a common topic across earnings calls. While initiatives are in early stages and details remain limited, some companies provided a glimpse under the hood into projects being developed (read more here).

Buyback activity moderates in 1Q21 but remains an important capital allocation priority. Repurchase activity in 1Q21 slowed to a combined $182 million—vs. the $322 million spent on repurchases in 4Q20—as a handful of companies took a standby approach to balance capital allocation priorities and/or wait for better opportunities to deploy buybacks.[2] Companies like Plains All American (PAA), Magellan Midstream Partners (MMP), and Kinder Morgan (KMI) reiterated plans—or the optionality—to repurchase shares in the second half of 2021, either opportunistically, or as a percentage of excess cash flow after distributions (read more here). 

The Dakota Access Pipeline (DAPL) averts shutdown.[3] The D.C. District Court ruled to keep the DAPL in service, denying tribal request for temporary shutdown. While the pipeline will remain under a court-mandated environmental review until March 2022, much of the near-term legal overhang was removed, materially improving the odds of pipeline operations continuing throughout the entirety of the review process. The outcome bodes well for Energy Transfer (ET) and Phillips Partners (PSXP), while ONEOK (OKE), Crestwood Equity Partners (CEQP), MPLX (MPLX) and Enbridge (ENB) also benefit. 

Constituent News

MPLX (MPLX) reported strong 1Q21 results, beating EBITDA estimates by $60 million as contract protections and realized cost reduction proved significant. Sustained capital discipline complemented strong results as the company deployed $155 million in unit buybacks following the $33 million spent in 4Q20—with $812 million still available under its buyback authorization.[4]

Energy Transfer (ET) reported a momentous 1Q21 EBITDA of $5.04 billion, beating estimates by a sizeable $2.30 billion on the back of one-time winter storm benefits. Excluding the impacts from the storm, ET raised 2021 EBITDA guidance by $100 million at the midpoint to reflect base business improvement.[5] 

The Williams Company (WMB) beat EBITDA estimates by $106 million, driven by both one-time winter storm benefits and improvement in the base business—with results exceeding estimates even without one-time benefits. WMB raised its 2021 EBITDA guidance by $100 million at the midpoint to include improvements in the bases businesses and held growth capital spending levels steady for the remainder of the year.[6] 

Outlook

Vaccine dissemination across developed economies as well as strong fiscal stimulus in the United States continue to drive upward revisions to global economic forecasts for 2021.[7] Oil demand remains on solid footing and is expected to rebound the second half of 2021 on resurging economic activity as mobility restrictions ease and businesses begin to resume operations.  Energy, including midstream energy infrastructure, clearly stands to benefit from both stronger economic forecasts and oil demand. In the near-term, tightening oil supplies have boosted oil prices this year (WTI oil up over 37% YTD through May), which has helped make energy the best-performing sector in 2021. Reflation trade fuelled by expectations for economic growth and inflationary pressures continue to benefit energy, including midstream. While these macro tailwinds should be broadly supportive, midstream energy infrastructure stands out from the rest of the energy sector for its generous income, free cash flow potential, and buybacks.  Midstream yields remain attractive, with strong 1Q21 earnings results and a markedly improved outlook for the space supporting the reliability of midstream income. Withstanding oil price fluctuations, midstream companies are poised to generate meaningful free cash flow in 2021, with many names expected to have excess cash after dividends. Buybacks supported by excess cash flow could provide an additional tailwind for midstream equity performance. 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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