SteelPath September MLP update and news

Private equity has continued to invest in midstream as earnings season concludes better than expected

MLP market overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended August down 6.7% on a price basis and down 5.5% once distributions were considered. The AMZ results underperformed the S&P 500 Index’s 1.6% total return loss for the month. The best performing midstream subsector for August was the Petroleum Pipeline group, while the compression subsector underperformed, on average.

For the year through August, the AMZ is up 3.8% on a price basis, resulting in a 10.1% increase in total return. This trails the S&P 500 Index, which jumped 16.7% and 18.3% in 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 US Treasury Bond, widened by 110 basis points (bps**) over the month, exiting the period at 706 bps. This exceeds the trailing five-year average spread of 529 bps and the average spread since 2000 of approximately 377 bps. The AMZ indicated the distribution yield at month-end was 8.6%.

Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $2.5 billion of marketed debt over the month. MLPs and affiliates announced no new asset acquisitions in August, though one previously announced consolidation was completed (MLP acquired by diversified C-Corp sponsor).

Spot West Texas Intermediate (WTI) crude oil exited the month at $55.10 per barrel, down 5.9% over the period and 21.1% lower year-over-year. Spot natural gas prices ended August at $2.34 per million British thermal units (MMbtu***), up 2.6% over the month and 20.9% lower than August 2018. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $17.93 per barrel, 2.0% lower than the end of July and 52.9% lower than the year-ago period.

News

Major pipelines from Permian to Corpus Christi begin service. Crude oil began flowing on Plains All American Pipeline’s (NYSE: PAA/PAGP) Cactus II Pipeline, with capacity to deliver up to 670 thousand barrels of crude oil per day (Mbbls/d) from Wink, Texas to terminals along the Gulf Coast in and around Corpus Christi, Texas. Additionally, EPIC Midstream (private) began interim crude service through its Y-Grade pipeline, which will transport up to 440 Mbbls/d from the Permian Basin to the Corpus Christi area until early 2020 when EPIC’s 590 Mbbls/d Crude Pipeline will be placed into service and the Y-Grade Pipeline will begin transporting NGLs.1 Finally, Kinder Morgan (NYSE: KMI) began filling its Gulf Coast Express Pipeline, a pipeline designed to transport up to two billion cubic feet of natural gas per day from the Permian to a natural gas hub near Corpus Christi. Full commercial service is slated to begin in October.

Private equity buying midstream. Late in the month Blackstone Infrastructure Partners made an offer to take Tallgrass Energy (NYSE: TGE) private at an approximate 35.9% premium over TGE’s closing price on the date of the offer. Blackstone already holds Class A and B shares of TGE, representing approximately 44% of the outstanding equity interests that were acquired in March 2019.2

Secord quarter earnings season concludes. Second quarter reporting season was largely completed by the end of August. Through month-end, 61 midstream entities had announced distributions for the quarter, including 27 distribution increases, 32 unchanged distributions from the previous quarter, and two dividend suspensions. Through the end of August, 64 sector participants had reported second quarter financial results. Operating performance has been, on average, better than expected with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 0.3% higher than consensus estimates, 0.3% lower than the preceding quarter, and 17% higher on a year-over-year basis.3

Chart of the month

SteelPath recently published “Private equity continues to invest in midstream”, where we discussed the underlying midstream fundamentals, as well as the continued private equity interest in midstream assets. Visit the link above or https://www.blog.invesco.us.com to subscribe to receive our blogs directly.

Figure 1: Private equity has been ramping up investment in midstream at higher valuations than where public MLPs trade

Source: Morgan Stanley and company press releases as of 6/30/19. Past performance is no guarantee of future results
Source: Wells Fargo Research as of 6/30/19. Past performance is no guarantee of future results.

Footnotes

All data is sourced to Bloomberg as of 8/30/2019 unless otherwise indicated

  1. Source: Plains All American Pipeline
  2. Source: Tallgrass Energy
  3. Source: SteelPath and midstream companies, as of 8/30/2019

Important Information

The midstream MLPs are indexed against the Alerian MLP Index

Private transactions are represented by a pool of transactions compiled by Wells Fargo Research as of 6/30/2019

* A yield spread is the difference in yield between debt instruments of varying maturities

** One basis point equals one one-hundredth of 1 percentage point. Changes in interest rates or other financial assets are measured in basis points.

*** MMbtu represents a standard unit of measure for the price of natural gas

Blog header image:VisualSpectrum / Stocksy

The mention of specific companies does not constitute a recommendation by 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 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.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.

Invesco Distributors, Inc.

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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