SteelPath February MLP update and news

Incentive distribution rights continue to fall by the wayside and fourth quarter earnings season begins

In January, the master limited partnership (MLP) sector saw two more companies eliminate incentive distribution rights (IDRs) and the beginning of Q4 earnings season.  In our Chart of the Month, we look back at oil demand during the SARS outbreak in 2003 to see how it compares to today’s novel coronavirus.

MLP market overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended January down 6.6% on a price basis and down 5.6% once distributions were considered. The AMZ underperformed the S&P 500 Index’s 0.0% total return for the month. The best performing midstream subsector for January was the propane group, while the marine subsector underperformed, on average.

MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, widened by 126 basis points (bps) over the month, exiting the period at 852 bps. This is below the trailing five-year average spread of 561 bps and the average spread since 2000 of approximately 385 bps. The AMZ indicated distribution yield at month-end was 10.0%.

Midstream MLPs and affiliates raised $1.6 billion of new marketed equity (common or preferred, excluding at-the-market programs) and $13.0 billion of marketed debt during the month. MLPs and affiliates announced $0.1 billion of asset acquisitions over the month.

Spot West Texas Intermediate (WTI) crude oil exited the month at $51.56 per barrel, down 15.6% over the period and 4.1% lower year-over-year. Spot natural gas prices ended January at $1.91 per million British thermal units (MMbtu), down 8.6% over the month and 33.0% lower than January 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $20.31 per barrel, 2.1% lower than the end of December and 24.7% lower than the year-ago period.

News

Two more MLPs eliminate IDRs. CNX Midstream (NYSE: CNXM) announced an agreement with its sponsor, CNX Resources (NYSE: CNX), to eliminate CNXM’s incentive distribution rights (IDRs) in exchange for common units, Class B units, and deferred cash payments that will be paid in three installments. This allows the transaction to be immediately accretive to distributable cash flow (DCF) per unit in the first year and gain further accretion in year two. Additionally, CrossAmerica Partners (NYSE: CAPL) announced an agreement to eliminate all IDRs and to acquire retail and wholesale assets from entities affiliated with Joe Topper— CAPL’s chairman, who recently reacquired a controlling stake in the partnership after selling his interests in CAPL’s predecessor company in 2014.

Western and OXY take steps toward parting ways. Western Midstream Partners (NYSE: WES) and its sponsor, Occidental Petroleum (NYSE: OXY), announced the execution of agreements that will enable WES to fully operate as a stand-alone business, a move consistent with WES’s and Occidental’s joint effort to establish WES as an independent midstream company. These new agreements support WES’s ongoing and focused pursuit of third-party growth opportunities and underscore the importance of WES’s commitment to leverage its existing midstream infrastructure to attract additional Occidental and third-party volumes. The executed agreements include amendments to the limited partnership agreement that significantly expand unitholders’ rights, including the right to remove and replace Occidental as the general partner. OXY also stated its intent to continue its operational relationship with WES and expects to maintain a significant economic interest in WES, which Occidental will reduce to below 50% during 2020.

Fourth-quarter earnings season kicks off. Fourth-quarter reporting season began in January. Through month-end, 51 midstream entities had announced distributions for the quarter, including 20 distribution increases, four reductions, and 27 distributions that were unchanged from the previous quarter. Through the end of January, eight sector participants had reported third-quarter financial results. Operating performance has been, on average, better than expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 5.1% higher than consensus estimates and 6.9% higher than the preceding quarter.

Chart of the month

Oil prices have been roiled by the outbreak of the Wuhan coronavirus, falling by about 15% in the past two weeks and closing below $50 per barrel for the first time in over a year. In attempting to quantify the impact of the coronavirus, many have pointed to the similarities between this epidemic and the spread of SARS (Severe Acute Respiratory Syndrome) back in 2003.

Truth be told, there’s even less of a “playbook” within the oil markets when analyzing the link between SARS and the Wuhan coronavirus. Even estimates on the magnitude of demand destruction stemming from SARS in the early 2000s vary by some degree, from as low as 100 thousand barrels of oil per day (0.1% of global oil demand) up to 250 thousand barrels of oil per day (0.3%). However, as indicated in the chart below, this negative impact created a momentary dent in the overall global oil demand growth trend. We would further underscore that OPEC’s management of the oil markets back then wasn’t as cohesive and clear-cut as today.

Figure 1: Global Oil Demand During SARS Outbreak

Source: International Energy Agency

For a more in-depth discussion on the potential impacts of the virus, Invesco’s Chief Global Market Strategist penned some observations on 1/29 titled “Assessing the market impact of the Wuhan coronavirus”. Amidst the ongoing uncertainty on timing and scope of this virus, we would highlight her final sentence, “we would expect a fairly swift rebound as the contagion improves, particularly given the accommodative central bank environment supporting risk assets.”

Source: All data from Bloomberg L.P., as of 1/31/2020 unless otherwise specified. 

Important Information

Credit: Wizemark/ Stocksy

The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc.

The mention of specific securities does not constitute a recommendation to buy/sell on behalf of the Fund or 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 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.

Brian Watson serves as a Senior Portfolio Manager for the Invesco SteelPath strategies.

Prior to joining SteelPath in 2009, Brian was a Portfolio Manager and led the MLP research effort at Swank Capital LLC, in Dallas, Texas. He also covered the MLP and Diversified Energy sectors for RBC Capital Markets in the firm’s Equity Research Division from 2002 to 2005. Prior to this, Brian worked for Prudential Capital Group, helping to analyze, structure, and invest in debt private placements issued primarily by companies involved in the energy industry including those involved in oil field services, midstream services, and oil and gas exploration and production.

Brian holds a B.B.A. from the University of Texas at Austin and an M.B.A. from the McCombs School of Business at the University of Texas at Austin.  He is a CFA® charterholder.

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