July brought modest midstream equity price weakness despite positive commodity price movements. Quarterly earnings season kicked-off, the first to include meaningful impact from the ongoing battle with COVID-19 and the resulting impact on global demand for hydrocarbons.
MLP market overview
Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended July down 4.8% on a price basis and down 3.6% once distributions are considered. The AMZ results underperformed the S&P 500 Index’s 5.6% total return for the month. The best performing midstream subsector for July was the Compression group, while the Petroleum Pipeline subsector underperformed, on average.
For the year through July, the AMZ is down 41.9% on a price basis, resulting in a 38.1% total return loss. This compares to the S&P 500 Index’s 1.2% and 2.4% price and total returns, respectively. The Propane group has produced the best average total return year-to-date, while the Marine subsector has lagged.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, widened by 82 basis points (bps) over the month, exiting the period at 1,194 bps. This compares to the trailing five-year average spread of 643 bps and the average spread since 2000 of approximately 405 bps. The AMZ indicated distribution yield at month-end was 12.5%.
Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $3.0 billion of debt during the month. No new asset acquisitions were announced in July.
Spot West Texas Intermediate (WTI) crude oil exited the month at $40.27 per barrel, up 2.5% over the period and 31.3% lower year-over-year. Spot natural gas prices ended July at $1.80 per million British thermal units (MMbtu), up 5.0% over the month but 20.7% lower than July 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $18.77 per barrel, 10.1% higher than the end of June and 2.6% higher than the year-ago period.
Second quarter earnings season begins. Second quarter reporting season began in July. Through month-end, 47 midstream entities had announced distributions for the quarter, including four distribution increases, four reductions, and 39 distributions that were unchanged from the previous quarter. Through the end of July, 13 sector participants had reported second quarter financial results. Operating performance has been, on average, better than expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 3.9% higher than consensus estimates but 9.8% lower than the preceding quarter.1
Warren Buffett buys more midstream. Dominion Energy (NYSE: D) announced the sale of the company’s midstream assets to an affiliate of Warren Buffet’s Berkshire Hathaway (NYSE: BRK/A) in a transaction valued at $9.7 billion.2 The transaction includes more than 7,700 miles of natural transmission pipelines and about 900 billion cubic feet of gas storage. Berkshire’s existing midstream portfolio includes natural gas pipeline systems in the Midwest (Northern Natural Gas) and Western United States (Kern River).
CNX Midstream gets acquired by its parent. CNX Resources (NYSE: CNX) announced plans to acquire the public stake in CNX Midstream Partners LP (NYSE: CNXM), in an all-stock transaction valued at $357 million, a 28% premium to CNXM’s last closing price. CNX Midstream Partners holders will receive 0.88 shares of CNX for each CNXM unit. The transaction is expected to close during the fourth quarter of 2020.
Chart of the Month: crude oil, more than just gasoline
A barrel of crude oil provides more than just gasoline including many products used daily in households everywhere.
1 Source: Bloomberg, L.P., and Invesco SteelPath research team, as of 7/31/20
2 Source: Dominion Energy company press release, 7/6/20
3 Source: CNX Resources press release, 7/27/20.
Image credit: Dimitry Anikin / Unsplash
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The opinions referenced above are those of the author as of August 11, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.
The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc.
The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
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. 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. An investment cannot be made directly into an index. Past performance does not guarantee future results.
A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level, calculated by deducting the yield of one instrument from the other.
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. 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.