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Midstream Energy Monthly Report | September

 

  • At the end of August, the underlying index for the midstream energy ETF (MMLP), AEDW, was yielding 7.32%. Notably, investment-grade companies represented 84.64% of the index by weighting. 
  • Dividend stability continued through 2Q21, with 28 of 29 AEDW constituents raising or maintaining their dividends sequentially, adding confidence to the reliability of midstream income.
  • While midstream sold off with oil and energy stocks in late July and August, the fundamental picture for midstream improved in many respects as reflected by positive estimate revisions coming out of 2Q21 earnings season.

 

Performance Review

  • August: AEDW -2.08%
  • WTI oil prices decreased 7.37% in August.

Yield

The current yield for AEDW is 7.32%*, which is below the five-year average of 7.60%. 

*as of 31.08.21

 

What has driven this performance?

Midstream energy infrastructure was slightly down in August as bouts of volatility across oil and broad equity markets overshadowed a strong 2Q21 midstream earnings season. Oil prices and energy equities fell amid concerns over the spread of the Delta variant and its ensuing effect on economic activity and oil demand. However, 2Q21 earnings results for midstream were generally strong with several companies raising 2021 guidance or indicating that full-year results are expected to be at the high end of provided guidance ranges. Solid company performance helped midstream outperform oil prices in August. AEDW traded relatively in line with the Energy Select Sector Index (IXE), which fell 1.92% on a total-return basis for the month. AEDW underperformed the Stoxx Europe 600 Oil and Gas Index (SXEP), which was up 2.64% on a total-return basis in August. The underlying index of our midstream energy ETF was trading at 9.92x consensus 2022 EBITDA estimates at the end of August compared to a historical (ten-year) average EV/EBITDA multiple for midstream of ~12.1x. 

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

 

MMLP Performance Table (As of 31.08.21)

 

 

1M

3M

6M

YTD

12M

SI

Alerian Midstream Energy Dividend UCITS ETF

-1.95%

-2.95%

17.59%

31.73%

NA

47.81%

Alerian Midstream Energy Dividend Index (NTR)

-2.08%

-3.08%

17.16%

30.85%

41.30%

44.99%

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 31/08/21. Please note that all performance figures are showing net data.

 

Industry News

Dividends steady with some smaller names providing growth. 

Even after year-to-date gains of over 30%, the AEDW Index yield of 7.32% remains compelling, with steady dividend payments adding confidence to the income opportunity. The table below details sequential dividend changes for the top 20 constituents of the AEDW Index by weighting. Since the 1Q20 cuts announced in the early days of the pandemic, dividends have been largely steady. For 2Q21 payouts (those dividends paid in 3Q21 based on 2Q21 performance), 28 of 29 AEDW constituents raised or maintained their dividends sequentially, representing 97.64% of the index by weighting. Dividend/distribution changes came from a handful of mid-cap and small-cap constituents. Cheniere Energy Partners (CQP) raised its distribution by 1%, building on the series of consecutive increases since 1Q19. Western Midstream Partners (WES), which reduced its dividend in 1Q20 to improve financial flexibility, raised its distribution by 1% for the second consecutive quarter as the company targets 5% annualized distribution growth.  The lone cut came from Shell Midstream Partners (SHLX), which reduced its dividend by 35% to check financial stability and provide a long-term sustainable financial framework. Please note that all performance figures are showing net data.

 

Constituent News

Positive earnings momentum, constructive outlooks, buybacks, and ESG progress for midstream. 

2Q21 Earnings Season – Earnings results were largely positive for the midstream space, and forward estimates generally moved higher as companies raised guidance in some cases. Of the top ten constituents of AEDW, eight saw positive 2021 EBITDA revisions and seven saw upward revisions to 2022 estimates from June to the end of August (post-earnings). Williams (WMB) [1] reported  record quarterly volumes across its network and now expects full-year EBITDA to come in at the higher end of their 2021 guidance range of $5.2 billion to $5.4 billion.  The company is also expecting year-end leverage to fall below its 2021 guidance of 4.2x and is evaluating a potential buyback program. ONE (OKE) reported 2Q21 EBITDA that surpassed consensus estimates, and management now expects yearly EBITDA to surpass their 2021 guidance midpoint of $3,200. MPLX (MPLX) reported strong 2Q21 results as higher volumes in the logistics and storage segment drove EBITDA past consensus forecasts. MPLX spent $155 million on unit buybacks in 2Q21.

Kinder Morgan (KMI) announced [1] in July its agreement to acquire Kinetrex Energy, a renewable natural gas (RNG) producer, for $310 million.  This marks the first official project led by KMI’s Energy Transitions Ventures group formed back in March.[2] While the magnitude of the purchase is relatively small, it represents a step in the right direction and lays the groundwork for KMI to pursue future RNG projects. 

Energy Transfer (ET) discussed three potential carbon capture projects across its asset base on the company’s 2Q earnings call1. Importantly, ET noted that the projects would not require significant capital, or the required capital would be provided by ET’s partner in these projects. 

 

Outlook

While AEDW is down 12.44% from its relatively high in June, the investment case for midstream remains intact, and setting aside the moderation in oil prices, other energy fundamentals have improved for midstream since June. Second quarter earnings results were largely positive, with many names raising their 2021 guidance or anticipating full-year results at the high-end of provided guidance ranges (read more). Forward estimates have generally increased for the midstream space as discussed above. The oil rig count has continued to move higher, with 38 rigs added since the end of June contributing to a total year-to-date increase of 143 rigs (+53.5%) per Baker Hughes as of August 27.[4] Increasing upstream activity can only be positive for midstream. Since June, the US Energy Information Administration has maintained its US oil production estimates for 2021 and 2022, while modestly increasing its 2022 natural gas production forecast as natural gas prices have increased through the summer. With midstream equities down from their relatively high and EBITDA estimates increasing, valuations have only improved and remain compelling as other pockets of the market sit at or near record highs. Furthermore, steady distributions add confidence to an income profile that remains attractive, with AEDW yielding 7.37% as of August 31 – up from 6.94% at the end of June. Additionally, midstream companies continue to make progress with ESG initiatives. When considering the improving macro backdrop, positive estimate revisions, discounted valuations, generous yields, ESG progress, free cash flow generation, and buyback potential, the investment case for midstream remains compelling. 

 

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