MLP Market Overview1
MLPs, ended January up 4.3% on a price basis and 4.9% once distributions are considered. The AMZ results outperformed the S&P 500 Index’s 1.9% total return for the month. The best performing MLP subsector for January was the Marine group, while the Diversified group generated the least positive returns, on average.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, narrowed by 30 basis points (bps) over the month, exiting the period at 437 bps. This compares to a trailing five-year average spread of 419 bps and the average spread since 2000 of approximately 353 bps. The AMZ indicated distribution yield at month-end was 6.8%.
Midstream MLPs and affiliates raised $3.0 billion of marketed new equity (common and preferred, excluding at-the-market programs) and $2.2 billion of marketed debt during the month. MLPs and affiliates announced approximately $6.2 billion of asset acquisitions during January.
Spot West Texas Intermediate (WTI) crude oil exited the month at $52.81 per barrel, down 1.7% over the period but 57.1% higher year-over-year. Spot natural gas prices ended January at $3.00 per million British thermal units (MMbtu), down 18.4% over the month and 33.4% higher than January 2016. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $29.54 per barrel, 1.6% higher than the end of December and 87.8% higher than the year-ago period.
Major Corporate Realignments. Several significant corporate structure changes were announced in January. Williams (NYSE: WMB) and Williams Partners (NYSE: WPZ) announced simplification plans that included permanent elimination of the incentive distribution rights. DCP Midstream (NYSE: DCP) acquired the remaining physical assets of its parent. Enbridge (NYSE: ENB) announced the take-in of daughter entity Midcoast Energy Partners (NYSE: MEP) along with asset shuffling with Enbridge Energy Partners (NYSE: EEP). Finally, Marathon Petroleum (NYSE: MPC) announced plans to accelerate drop-downs of assets to MPLX (NYSE: MPLX) and its expectation to exchange its economic interests in the general partner of MPLX for newly issued MPLX common units in conjunction with the completion of the drop-downs. And in early February, ONEOK, Inc. (NYSE: OKE) announced plans to acquire its daughter entity, ONEOK Partners (NYSE: OKS).
President Trump’s Executive Orders Expected to Expedite Midstream Projects. President Trump signed multiple midstream-related executive orders in late January designed to expedite current and future midstream projects. Two orders were specific to the Keystone XL and Dakota Access Pipelines, each directing respective authorities to take all actions necessary and appropriate to facilitate the implementation of the projects. Additionally, President Trump signed an order to expedite the review and approval of high priority infrastructure projects. However, a fourth order that called for the development of plans to maximize the use of materials and equipment produced in the U.S. for all new pipelines, as well as retrofitted, repaired or expanded pipelines inside the borders of the United States, could, incrementally, impede or delay some projects.
Fourth-Quarter Reporting Season Underway. Fourth-quarter reporting season began in January. Through month-end, 67 midstream entities had announced distributions for the quarter, including 39 distribution increases and 28 distributions that were unchanged from the second quarter. Through the end of January, three sector participants had reported third-quarter financial results. Operating performance has been, on average, roughly in line with consensus expectations with EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), coming in 0.5% below consensus estimates and 4.5% higher than the third quarter of 2016,
Thought of the Month
The Permian Basin remains the center of attention. Drilling activity in the Permian remained relatively strong throughout the energy down cycle and activity has rebounded significantly in recent months as the next up cycle has, perhaps, begun. As such, the basin has also shown vigor within the midstream landscape.
In recent months, the doomsday narrative that had developed among market participants that the Permian was “over piped,” and that another major pipeline would never be needed, has shifted to fear of under capacity in the years ahead. IHS expects the Permian to exit 2017 producing 700 thousand barrels of oil per day (Mbbls/d) more than the 2016 exit rate, and to add another 400 Mbbls/d in 2018.2 In light of strong growth production prospects, in January several midstream companies took steps toward alleviating near-term takeaway capacity bottlenecks. Plains All American Pipeline (NYSE: PAA) announced the expansion of its Cactus Pipeline, adding 60 Mbbls/d of capacity to be placed into service during the third quarter of 2017. Magellan Midstream Partners (NYSE: MMP) and PAA announced plans to add 100 Mbbls/d of capacity to the BridgeTex pipeline beginning in the second quarter of 2017. And finally, Navigator Energy Services (Private) announced that it is expanding the footprint, destination options, storage and throughput capacity of its Big Spring Gateway Pipeline System.
M&A activity in the Basin was also robust. Plains All American Pipeline announced the $1.2 billion acquisition of the Alpha Crude Connector gathering system, which is expected to benefit from production growth out of the Delaware sub-basin of the Permian. Separately, Targa Resources (NYSE: TRGP) announced the acquisition of Outrigger Energy, providing TRGP with additional scale in crude oil and natural gas gathering and processing in the basin. It also boosts the partnership’s fee-based business mix.
We expect the Permian to continue to see robust activity levels and garner the most headlines. But as we have noted in past blogs and Thoughts of the Month, we believe that other basins may similarly benefit from increased drilling efficiencies and reduced well costs. As these other basins garner renewed producer activity, we expect trough expectations to continue to improve.
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1 Source: Bloomberg, 1/31/16.↩
2 Source: IHS North America Crude Oil Markets Short-Term Outlook, January 2017.↩
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.
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