Midstream Master Limited Partnerships (MLPs) as measured by the Alerian MLP Index (AMZ), ended June 2019 up 2.6% on a price basis and once distributions were considered. The AMZ results underperformed the S&P 500 Index’s 7.0% total return for the month. The best performing midstream subsector for May was the Compression group, while the Propane subsector underperformed.
For the year through June, the AMZ is up 12.4% on a price basis, resulting in a 16.9% total return. This compares to the S&P 500 Index’s 17.3% and 18.5% price and total returns, respectively. The Compression group has produced the best average total return year-to-date, while the Gathering and Processing subsector has lagged.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year US Treasury Bond, narrowed by 16 basis points (bps) over the month, exiting the period at 597 bps. This compares to the trailing five-year average spread of 517 bps and the average spread since 2000 of approximately 375 bps. The AMZ indicated distribution yield at month-end was 8.0%.
Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $3.9 billion of marketed debt during the month. MLPs and affiliates announced $400 million of asset acquisitions over the month.
Spot West Texas Intermediate (WTI) crude oil exited the month at $58.47 per barrel, up 9.3% over the period and 21.1% lower year-over-year. Spot natural gas prices ended June at $2.42 per million British thermal units (MMbtu), down 4.7% over the month and 18.5% lower than June 2018. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $19.47 per barrel, 1.2% lower than the end of May and 45.5% lower than the year-ago period.
Large Project Announcements. Plains All American Pipeline (NYSE: PAA/PAGP) and Phillips 66 (NYSE: PSX) announced that they are moving forward with construction of the Red Oak Pipeline system to transport crude oil from Cushing, Oklahoma, and the Permian Basin in West Texas to Corpus Christi, Ingleside, Houston, and Beaumont, Texas. Concurrently, PSX and Bridger Pipeline (Private) announced plans to proceed with the Liberty Pipeline to transport crude oil from the Rockies and Bakken production areas to Cushing, Oklahoma. Both pipelines systems are expected to be placed into service as early as the first quarter of 2021. Additionally, MPLX, LP (NYSE: MPLX), WhiteWater Midstream (Private), Stonepeak Infrastructure Partners (Private), and West Texas Gas (Private) announced plans to move forward with the Whistler Pipeline to transport natural gas from Waha, Texas to the Agua Dulce area in South Texas. The Whistler Pipeline is expected to be in service in the third-quarter of 2021.
GasLog Eliminates IDRs. GasLog Ltd. (NYSE: GLOG) and GasLog Partners LP (NYSE: GLOP) reached an agreement to eliminate the incentive distribution rights in exchange for newly issued GLOP limited partner units. The transaction, which is expected to be immediately accretive to GLOP distributable cash flow per unit and cash flow neutral based on current IDR distributions, should provide GLOP with enhanced ability to pursue growth opportunities by reducing its expected cost of capital.
RTLR Added to the AMZ. Alerian announced that recent IPO, Rattler Midstream (NYSE: RTLR), was added to the AMZ effective June 21, 2019, increasing the index constituent count to 36. At month-end, RTLR represented a 0.8% position in the index, the 23rd largest position.
Chart of the Month
Exports of Liquified Petroleum Gases (LPGs) continue to reach new highs. The latest data from the Energy Information Agency (EIA) indicates exports of butane and propane hit 1.7 million barrels per day in April 2019, a 16.6% increase from April 2018 and sevenfold increase since the LPG export phenomenon began in 2012. Publicly traded midstream companies facilitated 83% of April LPG exports with the primary activity driven by Enterprise Products Partners (NYSE: EPD), who accounted for 45% of exports, Energy Transfer Partners (NYSE: ET) at 23%, and Targa Resources (NYSE: TRGP) – 12% of LPG exports for the period.1 Data from Bloomberg New Energy Finance indicates that export volumes have risen further, exceeding 1.8 million barrels per day in mid-June.
Figure 1: US Exports of Liquified Petroleum Gases
1 Sources: Bloomberg New Energy Finance and Invesco SteelPath estimates
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The mention of specific companies does not constitute a recommendation by Invesco Distributors, Inc. Certain Invesco funds may hold the securities of the companies mentioned. A list of the top 10 holdings of each fund can be found by visiting invesco.com.
The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. The S&P 500 Index is a broad-based measure of domestic stock market performance. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.
Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Each fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. Diversification does not guarantee profit or protect against loss.
The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.