For the year through April, the AMZ is down 6.2% on a price basis, resulting in a 3.9% total return loss. This compares to the S&P 500 Index’s 1.0% and 0.4% price and total return losses, respectively. The Upstream group has produced the best average total return year-to-date, while the Natural Gas Pipeline subsector has lagged.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, narrowed by 82 basis points (bps) over the month, exiting the period at 532 bps. This compares to the trailing five-year average spread of 469 bps and the average spread since 2000 of approximately 365 bps. The AMZ indicated distribution yield at month-end was 8.3%.
Midstream MLPs and affiliates raised $0.5 billion of marketed new equity (common and preferred, excluding at-the-market programs) and $1.0 billion of marketed debt during the month. MLPs and affiliates announced approximately $0.3 billion of asset acquisitions during April.
Spot West Texas Intermediate (WTI) crude oil exited the month at $68.57 per barrel, up 6% over the period and 39% higher year-over-year. Spot natural gas prices ended April at $2.75 per million British thermal units (MMbtu), down 6% over the month and 13% lower than April 2017. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $33.39 per barrel, 13% higher than the end of March and 37% higher than the year-ago period.
Consortium Announces New Permian to Gulf Coast System. Phillips 66 Partners (NYSE: PSXP) announced that it has received sufficient binding commitments to proceed with construction of the Gray Oak Pipeline system to provide crude oil transportation from West Texas to destinations along the Gulf Coast. The pipeline is owned by PSXP (75%) and Andeavor (NYSE: ANDV, 25%). Additionally, PSXP and ANDV formed a joint venture with Buckeye Partners (NYSE: BPL) to develop a new deep-water, open-access marine terminal in Ingleside, Texas. The terminal, to be constructed and operated by BPL, will offer 3.4 million barrels of crude oil storage capacity, connectivity to the Gray Oak pipeline, and two deep-water vessel docks as part of the initial scope of construction, with expansion options to include over 10 million barrels of storage capacity as well as multiple additional docks and other inbound pipeline connections.
EQT Advances Simplification. EQT Corporation (NYSE: EQT) announced additional steps in its plan to simplify its corporate structure that include a drop-down of the Rice retained midstream assets to EQT Midstream Partners (NYSE: EQM) for $1.52 billion, a merger of EQM and Rice Midstream Partners (NYSE: RMP) in a unit-for-unit transaction, and the sale of RMP’s Incentive Distribution Rights to EQT GP Holdings (NYSE: EQGP) for 36.3 million EQGP common units.
First Quarter Earnings Season Begins. First quarter reporting season kicked-off in April. Through month-end, 59 midstream entities had announced distributions for the quarter, including 29 distribution increases, two reductions, and 25 distributions that were unchanged from the previous quarter. Through the end of April, nine sector participants had reported first quarter financial results. Operating performance has been, on average, better than expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 2.3% higher than consensus estimates and 11.5% higher than the preceding quarter.
Thought of the Month: Dividends Matter
While energy market doldrums linger, we remain confident that a return to a more steady energy market is manifesting itself and believe further that the energy infrastructure landscape is attractively positioned with appealing growth potential and even more attractive valuations. As normalcy returns, we believe focus among market participants will return to the power that dividends have on long-term total return, and the current AMZ indicated distribution yield of 8.3% provides a strong starting point for any total return calculation.
While most investors are aware that, over time, dividends matter, we suspect some underestimate the real weight dividends carry on returns. For example, an investor in the S&P 500 since 1996 would have achieved 40% of its 561% total return (9% annualized) through receiving and reinvesting their dividends.
For midstream, or MLP, investors this avenue of return is even more pronounced with nearly 80% of the AMZ’s 1,070% (12% annualized) in total return since 1996 derived from receiving and reinvesting distributions.
To provide greater context for MLPs, we deconstructed price and distribution sources of return. In this case, assuming no reinvestment of distributions received, total return since 1996 would have approximated 530% (9% annualized), with 59% of this return delivered through distributions received.
Of course, as investors are unfortunately very aware, since approximately July 2014 the energy and energy midstream sectors have been struggling through the impacts of the crude oil price collapse. As a result, few energy companies or MLPs have delivered positive price performance over this period. However, a few examples show the power of distributions even during this period. One of the best-performing MLPs over this period (July 2014 to April 2018) was Tallgrass Energy Partners (NYSE: TEP) which delivered relatively stable price performance of positive 3%. However, on a total return basis, including distributions received and reinvested, TEP has provided a 28% return. Or, consider Holly Energy Partners (NYSE: HEP), which offered a higher distribution rate prior to July 2014, and which over the same time frame has experienced a 13% decline in unit price. After considering distributions received and reinvested, however, HEP provided a 29% total return.
Therefore, while we have a positive outlook on the asset class (see our recent article, What’s the Catalyst for MLPs? also available on ofiglobal.com), we believe a simple moderation of investor anxiety could allow greater focus on the long-term power of the sector’s distributions.
Notably, the distribution or dividend capture opportunity for the asset class currently sits materially above the broader market or competing equity yielding assets classes. The current indicative yield of the S&P 500 is approximately 1.9% versus an indicative yield for the Alerian MLP Index of approximately 8.3%.
Oppenheimer SteelPath mutual funds may hold some of the above mentioned securities. A list of the top 10 holdings of each fund can be found by visiting oppenheimerfunds.com.
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. The Dow Jones Equity All REIT Index is designed to measure all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. The Dow Jones Utility Average, also known as the Dow Jones Utilities Index, aims to represent the stock performance of 15 large, well-known U.S. companies within the utilities industry. 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.