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Midstream Energy Monthly Report | July

 

  • At the end of June, the underlying index for our oil and gas ETF, AEDW, was yielding 6.94%. Notably, investment-grade companies represented 83.17% of the index by weighting.
  • Private equity involvement picked up in June, highlighting the value proposition of the midstream space as AEDW constituents sold non-core assets at attractive valuations to increase financial flexibility and optimize asset portfolios.
  • Midstream made strides on the ESG front with a handful of AEDW constituents announcing clean energy projects and innovative technologies to monitor and reduce emissions.

 

Performance Review

  • June: AEDW 3.55%
  • WTI oil prices increased 10.78% in May.

The current yield for AEDW is 6.94% (as of 30.06.2021), which is in line with the five-year average of 7.57%. 

Alerian Midstream Energy Dividend Index (AEDW)

June

12 Month*

3.55%

52.59%

 

Dividend Yield

 

June

AEDW

6.94%

Past performance is no guarantee of future performance. Source: Alerian *12-month figures based on 30.06.20 – 30.06.21

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

 

What has driven this performance?

Midstream energy infrastructure gained in June as a handful of key names announced selective asset divestures at attractive multiples, highlighting the value of midstream assets. Oil prices rose steadily to their highest levels since 2018 as higher demand into the summer travel season was met with ongoing production restraint. Midstream and energy stocks traded in tandem with oil prices the first half of the month, posting yearly highs before diverging on selling pressures the second half of June. The Energy Select Sector Index (IXE) gained 4.30% in May on a total-return basis, slightly outperforming AEDW’s 3.30% monthly increase.

AEDW, the underlying index of our oil and gas ETF, significantly outperformed the Stoxx Europe 600 Oil and Gas Index (SXEP), which was up 2.00% on a total-return basis for the month of May. Even after nine consecutive months of positive performance, AEDW was trading at 10.3x consensus 2022 EBITDA estimates at the end of May compared to a historical (ten-year) average EV/EBITDA multiple for midstream of ~12.1x.

Current/past performance is no guarantee of future performance *as of 30.06.21

Source of all data: Alerian, Bloomberg

 

MMLP Performance Table (As of 30.06.21)

 

1M

3M

6M

YTD

12M

SI

Alerian Midstream Energy Dividend UCITS ETF

3.49%

15.96%

40.48%

40.48%

NA

56.95%

Alerian Midstream Energy Dividend Index (NTR)

3.55%

15.71%

39.79%

39.79%

52.59%

54.90%

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 30/06/21.

 

Industry News

M&A and private equity involvement picks up in June.  More than $3 billion in assets were sold by midstream companies in transactions announced this month. Notably, the midstream space is leveraging increased private equity interest and a favourable energy environment to selectively divest assets at attractive valuations with the view of improving financial flexibility, enhancing shareholder returns, and advancing long-term objectives.  Following the transactions that took place earlier in the year,  additional private equity involvement highlights the value of midstream assets and adds confidence to the multi-year outlook (read more here).

Constituent News

Midstream companies make progress on ESG and energy transition initiatives.

The Williams Company (WMB) and Microsoft (MSFT) announced their collaboration to explore ways in which digital technology and innovation can assist WMB through the energy transition—with the aim to unlock new business models and create value on the path towards net zero. The two companies will explore opportunities around hydrogen, renewable gas, carbon capture utilization and storage, and energy storage solutions. [1] 

Pembina Pipeline (PPL CN) and TC Energy (TRP CN) announced their plan to jointly develop a large-scale carbon transportation and sequestration system in Alberta to transport more than 20 million tons of carbon dioxide (CO2) annually to reduce emissions and help achieve Canada’s climate targets. The project combines PPL’s and TRP’s industry experience and leverages their existing infrastructure to lay down the backbone for Alberta’s carbon capture utilisation and storage industry. [2]            

Enlink Midstream (ENLC), alongside increasing its 2021 yearly guidance, announced the formation of the Enlink Carbon Solutions Group.  The new segment will serve to identify energy transition opportunities, with a particular focus around carbon capture, utilization, and sequestration. [3] 

 

Outlook

The economic outlook remains on solid footing as greater vaccine distribution, falling COIVD-19 cases, and the reopening of economies continue to drive global growth forecasts higher.[4]  A strong start to the summer travel season, buoyed by the reopening global economy, is ramping up the demand for oil toward pre-pandemic levels. Higher demand coupled with disciplined production from OPEC+ and U.S. shale producers has boosted oil prices to highs not seen since 2018, with WTI oil up over 54.42% YTD through June, helping make energy the best-performing sector in 2021. Midstream energy infrastructure clearly stands to benefit from both stronger economic forecasts and oil demand. 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.  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. Supported by a strong outlook, midstream energy infrastructure is well positioned to provide attractive income to investors with the potential for total return as well. 

 

Learn more about our oil and gas ETF here.

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