The master limited partnership (MLP) sector saw a series of events take place in October, including the start of third- quarter earnings season and yet another MLP simplification eliminating incentive distribution rights. And though the weight of energy stocks in the S&P 500 Index recently hit an all-time low, we’ve seen this story before, and it may bode well for the MLP sector.
Midstream master limited partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), ended October down 7.4% on a price basis and down 6.3% once distributions are considered. The AMZ results trailed the S&P 500 Index’s 2.2% total return for the month. The best performing midstream subsector for October was the Marine group, while the Propane subsector underperformed, on average.
For the year through October, the AMZ is down 3.1% on a price basis, resulting in a 3.9% total return. This trails the S&P 500 Index’s 21.2% and 23.2% 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 65 basis points (bps) over the month, exiting the period at 764 bps. This exceeds the trailing five-year average spread of 542 bps and the average spread since 2000 of approximately 380 bps. The AMZ distribution yield at month-end was 9.3%.
Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) or debt over the month. MLPs and affiliates announced $6.2 billion in new asset acquisitions during October, including a major acquisition tied to an MLP simplification.
Spot West Texas Intermediate (WTI) crude oil exited the month at $54.18 per barrel, a 0.2% increase over the period and a 17.0% decline year-over-year. Spot natural gas prices ended October at $2.73 per million British thermal units (MMbtu), up 15.2% over the month but 17.5% lower than October 2018. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $22.01 per barrel, 11.3% higher than the end of September and 28.7% lower than the year-ago period.
Third-quarter earnings season begins. Third-quarter reporting season kicked-off in October. Through month-end, 51 midstream entities had announced distributions for the quarter, including 19 distribution increases and 32 unchanged distributions from the previous quarter. Through the end of October, 22 sector participants had reported third quarter financial results. Operating performance has been, on average, modestly below expectations, with EBITDA— Earnings Before Interest, Taxes, Depreciation and Amortization—coming in 1.0% lower than consensus estimates but 3.0% higher than the preceding quarter.
Another MLP simplification moves forward. Hess Midstream (NYSE: HESM) announced an agreement to acquire Hess Infrastructure Partners LP (HIP), including HIP’s outstanding economic general partner interest and incentive distribution rights (IDRs) in HESM. In addition, HESM will be converted into an “Up-C” structure in which IDR payments to sponsors are eliminated. Once the HESM transaction is completed, only 17 midstream entities with IDRs will remain:
|Blueknight Energy (NYSE: BKEP)||Enable Midstream (NYSE: ENBL)|
|BP Midstream (NYSE: BPMP)||Global Partners (NYSE: GLP)|
|CNX Midstream (NYSE: CNXM)||Martin Midstream (NYSE: MMLP)|
|CrossAmerica Partners (NYSE: CAPL)||Noble Midstream (NYSE: NBLX)|
|CSI Compressco (NYSE: CCLP)||Oasis Midstream (NYSE: OMP)|
|DCP Midstream (NYSE: DCP)||Shell Midstream (NYSE: SHLX)|
|Delek Logistics Partners (NYSE: DKL)||Summit Midstream (NYSE: SMLP)|
|Sunoco (NYSE: SUN)||TC Pipeline (NYSE: TCP)|
|USD Partners (NYSE: USDP)|
Private equity continues to show interest in energy infrastructure. Brookfield Super-Core Infrastructure Partners acquired a 25% equity stake in Cove Point LNG from Dominion (NYSE: D) for $2 billion. Cove Point owns a liquefied natural gas (LNG) import, export, and storage facility on the Maryland coast, including a 136-mile pipeline that interconnects the facility with the interstate pipeline system. These assets provide liquefaction, gasification, transportation, storage, and peaking gas supply services to customers in the United States, India, and Japan.
Chart of the month
Energy equities remain out of favor. The energy weighting within the S&P 500 Index has hit an all-time low of 4.3% versus the twenty-year average of 8.6%. We believe investor apathy has also impacted midstream fund flows and, as a result, price realization for sector participants. MLPs now trade at an EV/EBITDA multiple of 9.6x and yield 9.3% versus the 10-year average of 12.5x and 7.0%, respectively. Midstream trading weakness has persisted despite continued healthy operating performance and an average distribution coverage ratio that is at an all-time high. However, this is not the first-time midstream equities have suffered from investor apathy.
Between the fall of 1998 and the summer of 2000, the broader equity market, as measured by the S&P 500 Index, rose 60% while the Nasdaq soared 180%. Tech stocks were providing such great returns that other sectors struggled to gain interest. Over this period, MLPs, as measured by the Alerian MLP Index, only gained 3%, drastically underperforming, even though crude oil prices had rallied 150% over the same period. However, it should be pointed out, after distribution payments, MLP total return over this period neared 20%. This relative underperformance reversed in 2000 when tech and the broader market began to falter. Between the late summer of 2000 and the fall of 2002, the S&P 500 Index declined 50% and the Nasdaq lost 75%, while the Alerian MLP Index appreciated by 25% and provided a 45% total return, once factoring in distributions.
Figure 1: Tech bubble performance, December 1997 to December 2002
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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.
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