MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, narrowed by 62 basis points (bps) over the month, exiting the period at 569bps. This compares to the trailing five-year average spread of 497bps and the average spread since 2000 of approximately 371bps. The AMZ indicated distribution yield at month-end was 8.3%.
Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $6.3 billion of marketed debt during the month. MLPs and affiliates announced no asset acquisitions over the month.
Spot West Texas Intermediate (WTI) crude oil exited the month at $53.79 per barrel, up 18.5% over the period and 16.9% lower year-over-year. Spot natural gas prices ended January at $2.85 per million British thermal units (MMbtu), down 10.6% over the month and 14.7% lower than January 2018. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $26.99 per barrel, 12.1% higher than the end of December and 12.9% lower than the year-ago period.
Fourth-Quarter Earnings Season Begins. Fourth-quarter reporting season kicked off in January. Through month-end, 60 midstream entities had announced distributions for the quarter, including 23 distribution increases, six reductions, and 31 distributions that were unchanged from the previous quarter. Through the end of January, nine sector participants had reported fourth-quarter financial results. Operating performance has been, on average, better than expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 1.8% higher than consensus estimates and 2.4% greater than the preceding quarter.
Corporate Consolidations and M&A. Multiple previously announced midstream simplifications were completed during the month. EnLink Midstream, LLC (NYSE: ENLC) completed the acquisition of EnLink Midstream Partners (NYSE: ENLK), Valero Energy (NYSE: VLO) completed the acquisition of Valero Energy Partners (NYSE: VLP), Dominion Energy (NYSE: D) acquired Dominion Energy Midstream Partners (NYSE: DM), and Equitrans Corp (NYSE: ETRN) acquired EQGP Holdings (NYSE: EQGP). Additional simplifications are expected to close in February (Western Gas) and March (Antero).
Private Equity Stepping Forward to Fund Midstream Growth. Blackstone Infrastructure Partners agreed to acquire the general partner of Tallgrass Energy (NYSE: TGE) and 44% of the outstanding units, bringing substantial capital to help facilitate TGE’s meaningful project backlog. Semgroup (NYSE: SEMG) and KKR, a private equity group, formed a joint venture to create a Canadian midstream infrastructure platform, with SEMG contributing assets and KKR committing capital.
Chart of the Month
Despite equity price volatility, midstream EBITDA has continued to grow at a healthy pace driven by the continued strong growth in oil and natural gas production.
Source: East Daley Capital, SteelPath as of September 2018. MM boe/d: Million barrels of oil equivalent per day. EBITDA: earnings before interest, taxes, depreciation and amortization.
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