MLP Market Overview1
MLPs, as measured by the Alerian MLP Index (AMZ), ended December up 4.4% on a price basis. The AMZ results outperformed the S&P 500 Index’s 2.0% total return for the month. The best performing MLP subsector for December was the Propone group, while Upstream partnerships generated the weakest returns, on average.
For the year 2016, the AMZ was up 9.1% on a price basis, resulting in an 18.3% gain once distributions are considered. This compares to the S&P 500 Index’s 9.5% and 12.0% price and total returns, respectively, during the same period. The Coal group has produced the best average total return for the year, while the Upstream subsector was the only group to generate losses for the year.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, narrowed by 38 basis points (bps) over the month, exiting the period at 467 bps. This compares to a trailing five-year average spread of 417 bps and the average spread since 2000 of approximately 353 bps. The AMZ indicated distribution rate at month-end was 7.41%.
Midstream MLPs and affiliates raised $0.2 billion of marketed new equity (common and preferred, excluding at-the-market programs) and $1.5 billion of marketed debt during the month. MLPs and affiliates announced approximately $0.2 billion of asset acquisitions during December.
Spot West Texas Intermediate (WTI) crude oil exited the month at $53.72 per barrel, up 8.7% over the period and 45.0% higher year-over-year. Spot natural gas prices ended December at $3.68 per million British thermal units (MMbtu), up 11.7% over the month and 59.2% higher than December 2015. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $29.07 per barrel, 21.5% higher than the end of November and 73.4% higher than the year-ago period.
DAPL Hits a (Temporary) Roadblock. The Department of the Army announced that it would not approve an easement that would allow the proposed Dakota Access Pipeline to cross under Lake Oahe in North Dakota. The Army’s Assistant Secretary for Civil Works, Jo-Ellen Darcy, said she based her decision on a need to explore alternative routes for the pipeline. Darcy said that the consideration of alternative routes would be best accomplished through an Environmental Impact Statement (EIS) with full public input and analysis, an 11th hour change from the Army’s original conclusion that an EIS was unnecessary. However, it appears likely that a priority of the incoming Presidential administration will be to reverse this decision and ultimately grant the Lake Oahe easement.
Magellan to Expand in Seabrook. Magellan Midstream Partners (NYSE: MMP) and LBC Tank Terminals, LLC announced the expansion of their joint venture, Seabrook Logistics, via the construction of 1.7 million barrels of additional crude oil and condensate storage adjacent to LBC’s existing terminal in Seabrook, Texas. In addition, Seabrook Logistics will connect its facility to Magellan’s Houston crude oil distribution system and construct a new ship-loading dock.
EnLink Sells Howard Interests and Moves Forward with Chisholm III. EnLink Midstream Partners (NYSE: ENLK) announced the sale of its 31% interest in Howard Energy Partners to Alberta Investment Management for $190 million and the North Texas Pipeline to Atmos for $85 million. Additionally, ENLK announced that it is proceeding with the development of Chisholm III, a 200 million cubic feet per day expansion of processing on its existing Central Oklahoma system that is expected to be operational by year-end 2017.
Thought of the Month: Looking Back on 2016
2016 began with the AMZ posting a -28% total return through a February 11 trough, yet finished the year up 18%. The midstream sector outperformed the broader markets as the lows of the current energy cycle seem to have been reached and the beginnings of a recovery appeared on the horizon. Late in the period, the Organization of Petroleum Exporting Countries (OPEC) provided a potential acceleration to the rebalancing of crude oil supply and demand by announcing formal plans to reduce its production.
In retrospect, what is of most importance is that through the peaks and valleys of the energy cycle, energy infrastructure demand endures. While headlines and blogosphere commentary during the depths of a downturn almost always look irrational in hindsight, often the actual physical energy market continue to demand new projects, many of which get overlooked at the time for splashy negative headlines. 2016 is a case in point.
Below we revisit some examples of continued energy infrastructure development during 2016 that may have been missed or forgotten:
- Consolidated Edison (ED) entered into two separate 20-year agreements for firm-transportation capacity on both the Mountain Valley Pipeline (MVP) and Equitrans.
- The Ohio River joint venture between Energy Transfer Partners, LP (NYSE: ETP) and Traverse Midstream was placed in service. The 2.1 Bcf/d gas gathering trunkline services the Marcellus/Utica shale and interconnects with major pipelines such as REX, TETCO and eventually Rover.
- The first export cargo of liquefied natural gas (LNG) left the Sabine Pass facility in southwestern Louisiana bound for Brazil. The inaugural cargo was significant as it marked a new outlet, and potential long-term demand source, for U.S. natural gas production. The second train of the Sabine Pass facility completed commissioning in September.
- Williams Partners (NYSE: WPZ) executed long-term contracts to expand the Transco pipeline system to deliver gas to LNG projects in Corpus Christi, TX and Freeport, TX.
- Sunoco Logistics (NYSE: SXL) announced that Mariner East 1 began transporting both ethane and propane to the Marcus Hook Industrial Complex in Pennsylvania and began loading its first waterborne ethane shipment. With Mariner East 1 up and running, the Marcus Hook Industrial Complex is now positioned as the East Coast hub for processing and storing propane, ethane, and other natural gas liquids from the shale basins for distribution to local, domestic, and international markets.
- The Federal Energy Regulatory Commission (FERC) issued an Environmental Assessment for Kinder Morgan’s Susquehanna West project, designed to deliver Marcellus gas supply to an interconnection with National Fuel Gas Supply with projected in service as of November 2017.
- WPZ announced an expansion of infrastructure in the Gulf of Mexico to provide deepwater gas gathering services to the Appomattox development, located 80 miles offshore Louisiana, in approximately 7,200 feet of water.
- The Interstate Natural Gas Association of America (INGAA) Foundation released a study that concluded the U.S. and Canada are likely to need between $471 billion and $621 billion in investments in new midstream crude oil, natural gas and natural gas liquids infrastructure between 2015 and 2035.
- Energy Transfer Partners (NYSE: ETP) placed its Lone Star Express NGL pipeline into service from the Permian basin to Mont Belvieu, TX.
- FERC approved ETP’s Trans-Pecos pipeline, a Texas intrastate pipeline designed to transport 1.4 billion cubic feet per day of natural gas to the Mexican border. The project is expected to be in service during 2017.
- ETP placed the West Texas Orla gas processing plant into service.
- Royal Dutch Shell, PLC (NYSE: RDS.A) made the final investment decision to build a major petrochemical complex, comprising an ethylene cracker with a polyethylene derivatives unit, near Pittsburgh, Pennsylvania. Main construction will start in 2018, with commercial production expected to begin early in the next decade. The complex will use low-cost ethane from shale gas producers in the Marcellus and Utica basins to produce approximately 1.8 million tons of polyethylene per year. Polyethylene is used in many products, from food packaging and containers to automotive components.
- Enterprise Products Partners (NYSE: EPD) announced plans for a new natural gas processing plant in the Delaware Basin of West Texas and Southeastern New Mexico anchored by long-term commitments from a major producer that is expected to begin service in 2018.
- The Bayou Bridge pipeline jointly owned by ETP, SXL and Phillips 66 Partners (NYSE: PSXP) began commercial operations transporting crude between Nederland, TX and Lake Charles, LA.
- Kinder Morgan Inc. (NYSE: KMI) received FERC authorization for the $2 billion Elba Liquefaction Project.
- MMP announced plans to construct a new high-capacity marine terminal along the Houston Ship Channel to handle refined petroleum products. The new terminal will include 1 million barrels of refined products storage capacity, a new marine dock, and a pipeline from the existing Galena Park, TX terminal.
- Enterprise Products Partners began operations at a new cryogenic natural gas processing plant in Texas jointly with Occidental Petroleum Corporation (NYSE: OXY). Supported by long-term contracts, the plant is designed to accommodate the growing production of NGL-rich natural gas from the Delaware Basin.
- Buckeye Partners (NYSE: BPL) completed its Michigan/Ohio Expansion project and announced plans to further expand the project to deliver additional volumes from Midwest refineries to Pittsburgh as well as destinations further east
- Enterprise Product Partners (NYSE: EPD) placed into service an ethane export facility at Morgan’s Point along the Houston Ship Channel, the largest of its kind. In December, the facility loaded the inaugural cargo on the world’s first Very Large Ethane Carrier (VLEC).
- The first midstream initial public offering since June 2015 took place during the month, with strong demand. Noble Midstream Partners (NYSE: NBLX) priced 12.5 million units at $22.50, above the preliminary range of $19 to 21 per unit, to raise $281 million. NBLX provides crude oil, natural gas, and water-related midstream services for Noble Energy (NYSE: NBL) in the DJ Basin in Colorado and is developing new assets in the Delaware Basin in Texas.
- Line fill for the joint Saddlehorn/Grand Mesa pipeline began in October with full commercial operations beginning in November. The pipeline, with 350 thousand barrels per day of throughput capacity, transports crude oil from the DJ Basin in Colorado to Cushing, Oklahoma and is owned by Magellan Midstream Partners, Plains All American Pipeline (NYSE: PAA), NGL Energy Partners (NYSE: NGL), and Anadarko Petroleum (NYSE: APC).
- ETP’s Lone Star Frac IV was placed into service providing additional fractionation capacity at its Mont Belvieu complex.
- PAA began construction of its Diamond Pipeline joint venture which is expected to be placed into service during the fourth quarter of 2017.
- KMI completed construction on the last phase of its TGP South System Flexibility Project.
- ONEOK Partners (NYSE: OKS) completed the second phase of the Roadrunner Gas Transmission Pipeline and the WesTex expansion project, connecting markets in Mexico with supply in West Texas and the Mid-Continent.
- EQT Midstream (NYSE: EQM) placed its Ohio Valley Connector pipeline into service providing deliverability of natural gas from portions of Appalachia to markets in the Midwest.
- KMI announced the long awaited Canadian government approval for its Trans Mountain Expansion Project. The project, first announced in 2012, will expand the existing Trans Mountain Pipeline system between Edmonton, Alberta and Burnaby, British Columbia. The expansion will create a twinned pipeline, increasing the nominal capacity of the system from 300,000 barrels per day to 890,000 barrels per day.
- Crestwood Equity Partners (NYSE: CEQP) announced plans for the construction of natural gas gathering and compression systems to service Permian basin volumes of a major integrated oil company under a 20-year, fee-based agreement. The systems are expected to be completed in mid-2017.
- Phillips 66 (NYSE: PSX) shipped the first cargo from its newly constructed Freeport LPG Export Terminal. The facility can simultaneously load two ships with refrigerated propane and butane. MMP and LBC Tank Terminals, LLC announced the expansion of their joint venture, Seabrook Logistics, via the construction of 1.7 million barrels of additional crude oil and condensate storage adjacent to LBC’s existing terminal in Seabrook, Texas. In addition, Seabrook Logistics will connect its facility to Magellan’s Houston crude oil distribution system.
We believe MLPs and the midstream sector will continue to evolve with changing energy needs, and are excited about potential investment opportunities they’ll create in 2017 and beyond.
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1 Source: Bloomberg, 12/30/16.
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.
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.
Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
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.