The master limited partnership (MLP) sector saw a series of events take place in November, including the conclusion of third quarter earnings season and yet another MLP simplification eliminating incentive distribution rights. And while midstream equities underperformed energy equities and the broader markets in recent months, the story has been different in the bond market, where energy credit spreads have widened meaningfully and midstream has outperformed.
Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended November down 6.8% on a price basis and down 5.6% once distributions are considered. The AMZ results underperformed the S&P 500 Index’s 3.6% total return for the month. The best performing midstream subsector for November was the Propane group, while the Natural Gas Pipeline subsector underperformed, on average.
For the year through November, the AMZ was down 9.7% on a price basis, resulting in a 2.1% total return loss. This compares to the S&P 500 Index’s 25.3% and 27.6% 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 U.S. Treasury Bond, widened by 46 basis points (“bps”) over the month, exiting the period at 810 bps. This compares to the trailing five-year average spread of 550 bps and the average spread since 2000 of approximately 382 bps. The AMZ indicated distribution yield at month-end was 9.9%.
Midstream MLPs and affiliates raised $0.3 billion on new marketed equity (common or preferred, excluding at-the-market programs) and $1.6 billion of marketed debt during the month. MLPs and affiliates announced $1.2 billion of asset acquisitions over the month.1
Spot West Texas Intermediate (“WTI”) crude oil exited the month at $55.17 per barrel, up 1.8% over the period and 8.3% higher year-over-year. Spot natural gas prices ended November at $2.46 per million British thermal units (“MMbtu”), down 9.9% over the month but 46.6% lower than November 2018. Natural gas liquids (“NGL”) pricing at Mont Belvieu exited the month at $23.8 per barrel, 8.4% higher than the end of October but 5.4% lower than the year-ago period.
Third quarter earnings season concludes. Third quarter reporting season wrapped up in November. Through month-end, 58 midstream entities had announced distributions for the quarter, including 20 distribution increases and 38 distributions that were unchanged from the previous quarter. Through the end of November, 63 sector participants had reported third quarter financial results. Operating performance has been, on average, modestly better than expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 1.2% better than consensus estimates and 2.8% higher than the preceding quarter.
More MLP simplifications transpire. DCP Midstream (NYSE: DCP) announced and closed an agreement to acquire and eliminate their incentive distribution rights (IDRs) from its sponsors in exchange for 65 million newly issued units of DCP.2 Additionally, Noble Midstream Partners (NBLX) announced an agreement to acquire its sponsor’s remaining midstream assets, as well as NBLX’s IDRs, for $1.6 billion including 38.5 million newly issued units in NBLX issued to the sponsor, Noble Energy (NBL).3 Once announced pending transactions are completed the following entities with IDRs will remain:
|Blueknight Energy (BKEP)||BP Midstream (BPMP)|
|CNX Midstream (CNXM)||CrossAmerica Partners (CAPL)|
|CSI Compressco (CCLP)||Delek Logistics Partners (DKL)|
|Enable Midstream (ENBL)||Global Partners (GLP)|
|Martin Midstream (MMLP)||Oasis Midstream (OMP)|
|Shell Midstream (SHLX)||Sunoco (SUN)|
|TC Pipeline (TCP)||USD Partners (USDP)|
|Westlake Chemical Partners (WLKP)|
FERC approves four LNG facilities. The Federal Energy Regulatory Commission (“FERC”) approved four liquefied natural gas (LNG) projects and related facilities to export natural gas including three projects (Texas LNG, Annova LNG, and Rio Grande LNG) to be located along the Brownsville Ship Channel in Brownsville, Texas, and a fourth project (Corpus Christi Stage III) that would expand a currently operating facility near Corpus Christi, Texas.
Chart of the month
While midstream equities underperformed energy equities and the broader markets in recent months, the story has been different in the bond market, where energy credit spreads have widened meaningfully and midstream has outperformed. This suggests technical factors, such as tax-loss selling and year-end portfolio repositioning, have carried greater influence on midstream equity performance than perception of underlying business conditions.
Figure 1: Energy bond spreads
All data sourced from Bloomberg L.P. as of 11/30/2019 unless otherwise indicated
1. Sources: SteelPath estimates and company press releases as of 11/30/19
2. Sources: Company press releases as of 11/06/2019
3. Sources: Company press releases as of 11/15/2019
Blog Header Image: stanley45 / Getty
A yield spread is the difference in yields between debt instruments of varying maturities, credit ratings, and risk, calculated by deducting the yield of one instrument from another
The Bloomberg Barclays US Corporate Energy Midstream Index includes investment grade rated debt issues from North American companies involved in the midstream energy infrastructure sector
The Bloomberg Barclays US Corporate High Yield Energy Midstream Index includes high yield rated debt issues from North American companies involved in the midstream energy infrastructure sector.
The Bloomberg Barclays US Corporate Energy Index includes investment grade rated debt issues from North American companies involved in the energy sector.
The Bloomberg Barclays US Corporate High Yield Energy Index includes high yield rated debt issues from North American companies involved in the energy sector.
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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. 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.