Midstream Energy Monthly Report | June
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- 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
- 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.
Midstream Energy Dividend Index (AEDW)
Past performance is no guarantee
of future performance. Source: Alerian
*12-month figures based on 29.05.20
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.
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.
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.
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)
Alerian Midstream Energy Dividend UCITS ETF
Alerian Midstream Energy Dividend Index (NTR)
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.
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. 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. 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.
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.
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.
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.
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. 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.
Visit our Alerian Midstream Energy Dividend UCITS ETF fund page to learn more