Published Date: August 20, 2024
Author: HANetf
Despite several macroeconomic crosscurrents, we believe North American midstream companies remain well positioned to generate free cash flow and return excess cash flow to investors through dividends and opportunistic buybacks.
These free cash flow tailwinds and the defensive nature of midstream’s fee-for-service business models (i.e. collecting fees for moving, storing, and processing energy commodities) help insulate midstream from commodity price volatility. These characteristics separate midstream from other energy subsectors.
MMLP’s underlying index, AEDW, continued to see strong performance in July even as US oil and natural gas prices fell -4.5% and -21.7%, respectively. AEDW was up 3.52% in July on a net-total-return basis, outperforming the 2.2% total return for the Energy Select Sector Index (IXE) and a flat month for the Stoxx Europe 600 Oil & Gas Index (SXEP). Year-to-date through July, AEDW is up 18.71% on a net-total-return basis, outperforming the IXE and SXEP’s total returns of 13.1% and 6.1%, respectively.
Most names in AEDW announced their dividends in July, which included increases from two of the top-ten constituents. AEDW was yielding 6.3% at the end of the month, and companies with investment-grade credit ratings represented 93.3% of the index by weighting. Given attractive yields and the strength in midstream dividends, investors may increasingly look to energy infrastructure for income as interest rates fall.
Looking out over the next few years, midstream is well positioned to benefit from the anticipated step-change in US natural gas demand driven by liquefied natural gas (LNG) exports and power generation for data centers related to artificial intelligence (see chart overleaf).
This demand growth should support production growth, driving more volumes for AEDW constituents with midstream natural gas assets. These include gathering pipelines, processing plants, and long-haul natural gas pipelines. Almost 70% of AEDW by weighting is primarily focused on midstream services supporting natural gas, including liquefaction for exports. Midstream growth opportunities are biased towards natural gas (see constituent news).
Additional sources available upon request. Data as of 31/07/2024. Please remember that all performance figures are showing net data. Past performance is not indicative of future performance, and when you invest in ETFs your capital is at risk.
Source: Energy Information Administration; Goldman Sachs Asset Management. For illustrative purposes only. Chart displays expected data.
MPLX (MPLX 10.14% Weight), Enbridge (ENB CN, 10.28% Weight), and Targa Resources (TRGP, 2.08% Weight) are among the partners that will build the new Blackcomb Pipeline – a 2.5-billion-cubic-feet-per-day (Bcf/d) natural gas pipeline from the Permian to the Agua Dulce hub in South Texas. The pipeline is expected to be in service by the second half of 2026.
Energy Transfer (ET, 9.93% Weight) and Sunoco (SUN, not in MMLP) formed a new joint venture combining their oil and water gathering assets in the Permian Basin. ET will own 67.5% interest, while SUN will own the remaining 32.5%. ET also increased its distribution for the second quarter of 2024 by 0.79% to $0.32 per unit.
Enterprise Products Partners (EPD, 9.74% Weight) increased its distribution for the second quarter of 2024 by 1.9% to $0.525 per unit and repurchased $40 million in common equity during the second quarter.
EPD also announced a 300,000 barrel per day expansion of its propane and butane export capacity in the Houston Ship Channel, with the incremental capacity expected to come online in 2025 and 2026.
Kinder Morgan (KMI, 8.34% Weight) is expanding its Southern Natural Gas pipeline system by 1.2 Bcf/d to help meet growing demand for power generation and local distribution. The $3 billion project is expected to be in service by late 2028.
DT Midstream (DTM, 0.95% Weight) reported second quarter of 2024 earnings results ahead of Wall Street forecasts and reaffirmed its commitment to grow its dividend 5-7% annually in line with adjusted EBITDA growth.
Hess Midstream (HESM, 0.64% Weight) increased its distribution for the second quarter of 2024 by 2.5% to $0.6677 per share.
MMLP (Fund)AMCCDN* (Index)1M1.99%1.99%3M6.89%6.87%6M10.15%10.07%YTD31.37%31.26%12M32.83%32.71%3Y94.75%95.18%Since Inception (27/07/2020)280.93%271.68%
Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/07/2024
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 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. When you invest in ETFs and ETCs, your capital is at risk.
This report was written by, and is the opinion of VettaFi, the index provider of the Alerian Midstream Energy Dividend Index, the underlying index of MMLP. VettaFi does not issue, sponsor, endorse, sell, or promote MMLP.
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