April MLP performance appeared to reflect improving sentiment as COVID-19 containment efforts are set to ease in many locations. Furthermore, midstream investor anxieties may have been calmed by efforts to improve free cash flow generation through capital spending cuts and, for some, reductions to distribution payouts.
MLP Market Overview
Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended April up 48.0% on a price basis and up 49.5% once distributions were considered. The AMZ results outperformed the S&P 500 Index’s 12.8% total return for the month. The best performing midstream subsector for April was the Gathering and Processing group, while the Compression subsector underperformed, on average.
For the year through April, the AMZ is down 38.1% on a price basis, resulting in a 36.0% total return loss. This trails the S&P 500 Index’s 9.9% and 9.3% price and total return losses, respectively. The Propane group has produced the best average total returns year-to-date, while the Compression subsector has lagged.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, narrowed by 719 basis points (bps) over the month, exiting the period at 1,157 bps. This compares to the trailing five-year average spread of 609 bps and the average spread since 2000 of approximately 397 bps. The AMZ indicated distribution yield at month-end was 12.2%.
Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $1.7 billion of debt during the month. MLPs and affiliates announced no new asset acquisitions over the month.
Spot West Texas Intermediate (“WTI”) crude oil exited the month at $18.84 per barrel, down 8.0% over the period and 70.5% lower year-over-year. Spot natural gas prices ended April at $1.66 per million British thermal units (MMbtu), down 2.9% over the month and 35.9% lower than April 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $11.30 per barrel, 17.1% higher than the end of March and 54.7% lower than the year-ago period.
First quarter earnings season underway. First quarter reporting season began in April. Through month-end, 48 midstream entities had announced distributions for the quarter, including six distribution increases, 15 reductions, and 27 distributions that were unchanged from the previous quarter. Over the same time, six sector participants had reported first quarter financial results. Operating performance has been, on average, in-line with EBITDA expectations – Earnings Before Interest, Taxes, Depreciation and Amortization – coming in 0.3% higher than consensus estimates but 2.1% lower than the preceding quarter.
Chart of the month
Despite the unprecedented combination of a significant and abrupt crude oil demand destruction, due to a rapid expansion of COVID-19 containment efforts globally, and the threat of surging crude oil supply, due to the unanticipated emergence of a Saudi-Russian crude oil market share battle, total midstream EBITDA estimates, according to analysts at Wells Fargo, for 2020 and 2021 have declined by only 7% and 11%, respectively, since the beginning of 2020. Perhaps more importantly, estimated industry free cash flow, defined as distributable cash flow less growth capital expenditures and acquisitions, has increased by 15% and 9%, respectively, as the industry’s capital spending over 2020 and 2021 is now expected to be $15 billion less than Wells Fargo’s expectations coming into the year.
Figure 1: Midstream estimate changes since year-end 2019
All data sourced from Bloomberg L.P. as of April 30, 2020 unless otherwise stated
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The opinions referenced above are those of the author as of May 7, 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.
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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. An Investment cannot be made into an index. 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 MLP, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.