Master limited partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), ended September up 0.6% on both a price basis and total return basis. The AMZ results underperformed the S&P 500 Index’s 2.1% total return for the month. The best-performing MLP subsector for September was the Upstream group, while the Diversified subsector generated the weakest returns, on average.
For the year through September, the AMZ is down 10.4% on a price basis, resulting in a 5.6% loss once distributions are considered. This compares with the S&P 500 Index’s 12.5% and 14.2% price and total returns, respectively. The Marine group has produced the best average total return year-to-date, while the Upstream subsector has lagged.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, narrowed by 19 basis points (bps) over the month, exiting the period at 538 bps. This compares to a trailing five-year average spread of 458 bps and the average spread since 2000 of approximately 359 bps. The AMZ indicated distribution yield at month-end was 7.7%.
Midstream MLPs and affiliates raised $2.5 billion of marketed new equity (common and preferred, excluding at-the-market programs) and $5.2 billion of marketed debt during the month. MLPs and affiliates announced approximately $4.2 billion of asset acquisitions during September.
Spot West Texas Intermediate (WTI) crude oil exited the month at $51.67 per barrel, up 9.4% over the period and 7.1% higher year-over-year. Spot natural gas prices ended September at $2.89 per million British thermal units (MMbtu), down 0.3% over the month and 1.7% higher than September 2016. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $31.27 per barrel, 13.9% higher than the end of August and 3.90% higher than the year-ago period.
Alerian Makes Significant Index Methodology Change. On September 28, Alerian announced changes to the AMZ index methodology, most notably that individual AMZ constituents will now be capped at a 10% weight. The changes, which took effect on September 29, require market participants that track or closely follow the AMZ to reduce positions in Enterprise Products Partners (NYSE:EPD) and Energy Transfer Partners (NYSE:ETP), which represented approximately 21% and 12% of the AMZ, respectively. Notably, the largest index-linked exchange-traded product, Alerian MLP ETF (AMLP), tracks the Alerian MLP Infrastructure Index (AMZI), which already had a constituent weight limit of 10%.
IPO Cloud Lifting? Midstream entities began to test market demand for initial public offerings (IPOs) of equity during September. Oasis Midstream Partners (NYSE:OMP), an entity focused on midstream activities in the Bakken shale of North Dakota and Montana, raised approximately $120 million during September. Additionally, Howard Energy Partners (NYSE: HMP) and BP Midstream Partners (NASDAQ:BPMP) filed documents with the U.S. Securities and Exchange Commission for future IPOs.
Refiner-Linked MLPs Execute Large Transactions. Two of the largest refiner-linked MLPs, MPLX LP (NYSE:MPLX) and Phillips 66 Partners, LP (NYSE:PSXP), executed sizable “drop-down” transactions during September. MPLX acquired a 25% interest in the Explorer Pipeline; a 35% interest in the Southern Access Extension Pipeline; and a 41% interest in the Louisiana Offshore Oil Port from its parent, Marathon Petroleum (NYSE:MPC), for $1.1 billion. Later in the month, PSXP agreed to acquire a 25% interest in the Dakota Access Pipeline and a coking unit at the Sweeny refinery from its parent Phillips 66 (NYSE:PSX) for $2.4 billion.
Thought of the Month
Republicans in Congress recently introduced their framework for federal tax reform. In broad terms, the plan envisions a higher standard deduction, fewer tax brackets, the elimination of the alternative minimum tax, and lower small-business and corporate tax rates.
The current framework appears to be simply a starting point, with many details unspecified and left to be settled through negotiations with Democrats. However, the framework as it currently stands does not appear to impact the tax-status of publicly traded partnerships, including MLPs.
Other provisions may be helpful to MLP and midstream investors. For example, the proposed 25% tax rate for pass-through income could benefit partnership investors. Under the current tax code, pass-through income is taxed as ordinary income and subject to a potentially higher rate. C-Corp structured MLP investment vehicles, which constitute the majority of closed-end and open-end funds focused on the asset class (including the SteelPath suite of mutual funds), would also benefit from a lower rate of tax accrual.
A potentially negative effect from the proposed framework could be a reduction in the allowed rate of return for pipelines governed by the Federal Energy Regulatory Commission-regulated rate structure, as the tax-burden assumption in this calculation would be lowered. However, we believe this would have relatively limited impact on most MLPs.
Whether this framework ultimately results in any substantial tax reform is yet to be seen. However, the starting point appears to be neutral to favorable for midstream investors.
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As of 9/30/17, Oppenheimer SteelPath MLP Alpha Fund’s holdings were 10.25% in Energy Transfer Partners (NYSE:ETP); 8.52% in Enterprise Products Partners (NYSE: EPD); 7.06% in MPLX LP (NYSE:MPLX); 3.06% in Phillips 66 Partners LP (NYSE:PSXP); and 0.00% in Oasis Midstream Partners (NYSE:OMP), Howard Energy Partners (NYSE:HMP), BP Midstream Partners (NASDAQ:BPMP), Marathon Petroleum (NYSE: MPC), and Phillips 66 (NYSE:PSX).
As of 9/30/17, Oppenheimer SteelPath MLP Alpha Plus Fund’s holdings were 9.96% in Energy Transfer Partners (NYSE:ETP); 8.41% in Enterprise Products Partners (NYSE: EPD); 7.20% in MPLX LP (NYSE:MPLX); 3.04% in Phillips 66 Partners LP (NYSE:PSXP); and 0.00% in Oasis Midstream Partners (NYSE:OMP), Howard Energy Partners (NYSE:HMP), BP Midstream Partners (NASDAQ:BPMP), Marathon Petroleum (NYSE: MPC), and Phillips 66 (NYSE:PSX).
As of 9/30/17, Oppenheimer SteelPath MLP Income Fund’s holdings were 9.91% in Energy Transfer Partners (NYSE:ETP); and 0.00% in Enterprise Products Partners (NYSE: EPD), Oasis Midstream Partners (NYSE:OMP), Howard Energy Partners (NYSE:HMP), BP Midstream Partners (NASDAQ:BPMP), Marathon Petroleum (NYSE: MPC), MPLX LP (NYSE:MPLX), Phillips 66 Partners LP (NYSE:PSXP), Marathon Petroleum (NYSE: MPC), and Phillips 66 (NYSE:PSX).
As of 9/30/17, Oppenheimer SteelPath MLP Select 40 Fund’s holdings were 5.38% in Energy Transfer Partners (NYSE:ETP); 4.74% in MPLX LP (NYSE:MPLX); 3.68% in Enterprise Products Partners (NYSE: EPD); and 0.00% in Enterprise Products Partners (NYSE: EPD), Howard Energy Partners (NYSE:HMP), BP Midstream Partners (NASDAQ:BPMP), Phillips 66 Partners LP (NYSE:PSXP), Marathon Petroleum (NYSE: MPC), and Phillips 66 (NYSE:PSX).
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OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
The mention of specific companies does not constitute a recommendation by OppenheimerFunds, Inc. Certain Oppenheimer funds may hold the securities of the companies mentioned.
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.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
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. Additionally, investing in MLPs involves material income tax risks and certain other risks. Actual results, performance or events may be affected by, without limitation (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) changes in laws and regulations, and (5) changes in the policies of governments and/or regulatory authorities. Investing in MLPs may generate unrelated business taxable income (UBTI) for tax-exempt investors both during the holding period and at time of sale. Diversification does not guarantee profit or protect against loss.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.