MLP Market Overview1

MLPs,as measured by the Alerian MLP Index (AMZ), ended March down 1.3% on both a price basis and once distributions are considered. The AMZ results underperformed the S&P 500 Index’s +0.1% total return for the month. The best performing MLP subsector for March was the Diversified group, while the Upstream names generated the weakest returns, on average.

For the year through March, the AMZ is up 2.2% on a price basis, resulting in a 3.9% gain on a total return basis. This compares to the S&P 500 Index’s 5.5% and 6.1% price and total returns, respectively. The Gathering and Processing 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, widened by eight basis points (bps) over the month, exiting the period at 463 bps. This compares to a trailing five-year average spread of 421 bps and the average spread since 2000 of approximately 354 bps. The AMZ indicated distribution yield at month-end was 7.0%.

Midstream MLPs and affiliates raised $0.5 billion of marketed new equity (common and preferred, excluding at-the-market programs) and $1.8 billion of marketed debt during the month. MLPs and affiliates announced approximately $2.5 billion of asset acquisitions during March.

Spot West Texas Intermediate (WTI) crude oil exited the month at $50.60 per barrel, down 6.3% over the period and 32.0% higher year-over-year. Spot natural gas prices ended March at $3.10 per million British thermal units (MMbtu), up 23.3% over the month and 59.8% higher than March 2016. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $23.75 per barrel, 8.3% lower than the end of February and 34.8% higher than the year-ago period.

News

Keystone XL Gets Presidential Greenlight, But Will It Move Forward? TransCanada’s Keystone XL announced that the U.S. Department of State had signed and issued a Presidential Permit to construct the Keystone XL Pipeline. This is an important milestone for the project, but certainly not the final one. The company said it will continue to engage key stakeholders and neighbors throughout Nebraska, Montana and South Dakota to obtain the necessary permits and approvals to advance the project toward construction, but getting shipper commitments may be a challenge as other projects have moved forward during Keystone’s delays. Should it proceed, TransCanada said it didn’t expect to be ready for construction until well into 2018 and the project would take nearly three years to complete. Keystone XL is an addition to the current Keystone system which transports 545,000 barrels of oil per day underpinned by take-or-pay contracts with an average remaining term of 15 years.

Fourth-Quarter Reporting Season Concludes. Fourth-quarter reporting season wrapped up in March. Through month-end, 77 midstream entities had announced distributions for the quarter, including 46 distribution increases and 31 distributions that were unchanged from the third quarter. Through the end of March, 76 sector participants had reported fourth-quarter financial results. Operating performance was, on average, better than consensus expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 2.1% better than consensus estimates and 7.3% higher than the third quarter of 2016.

Alerian Index Changes. Alerian announced changes to the AMZ and AMZI during the month. Accordingly, on March 17, 2017, GasLog Partners (NYSE: GLOP) and Western Refining Logistics (NYSE: WNRL) were added to the AMZ, and Rice Midstream Partners (NYSE: RMP) was added to the AMZI.

Thought of the Month: North American Shale Plays

The U.S. drilling rig count has doubled from the May 2016 low of 404 to 824 currently. The resultant production trends that will accrue from this reflation of U.S. energy investment are beginning to dominate energy news. However, it is difficult to discuss these trends without rattling off a dozen names of oil and/or gas “plays” that sometimes refer to the geological formation (e.g., the Barnett Shale), the sedimentary basin (e.g., Permian Basin), a nearby town (e.g., Haynesville), or even a strangely conceived acronym (e.g., STACK or Sooner Trend Anadarko Basin Canadian and Kingfisher Counties). While discussing these oil and gas plays is necessary, it has come to our attention that the vast majority of these names hold little meaning or context. Therefore, over the next few months we plan to use the “Thought of the Month” to highlight the major North American shale plays, including their primary characteristics and trends. We hope these discussions will provide helpful context and interesting insights individually.

To begin the series, we start with a brief overview of the primary plays. (see map above)

According to the U.S. Energy Information Agency (EIA), in January 2017, the United States produced an average of 8.8 million barrels of crude oil per day and 88 billion cubic feet of natural gas per day. For both crude oil and natural gas, a little over half of the daily production comes from the major basins targeting crude oil such as the Bakken, Eagle Ford, Niobrara, and Permian, and from gas-focused basins such as the Haynesville, Marcellus, and Utica. Further, of the 824 rigs currently operating in the United States, 561, or 68%, are active in the aforementioned regions.

  • The Bakken Shale play is located primarily in the Williston basin of western North Dakota, producing approximately 11% of U.S. crude oil production and 2% of U.S. natural gas volumes. There are currently 42 rigs operating in the basin (5% of the active rigs in the U.S).
  • The Eagle Ford Shale play is located in south Texas and is currently producing approximately 13% of U.S. crude oil production and 7% of U.S. natural gas volumes. There are presently 73 rigs drilling in the play (9% of the active rigs in the U.S).
  • The Haynesville Shale play is located in northwestern Louisiana and northeast Texas and is currently producing approximately 7% of U.S. natural gas volumes and only de minimis volumes of crude oil. There are currently 38 rigs operating in the play (5% of the active rigs in the U.S).
  • The Marcellus Shale play is located in Pennsylvania, Ohio and West Virginia and is currently producing approximately 21% of U.S. natural gas volumes and only minor volumes of crude oil. There are presently 44 rigs drilling in the play (5% of the active rigs in the U.S).
  • The Niobrara Shale play is located primarily in northeastern Colorado and is currently producing approximately 5% of U.S. crude oil production and 5% of U.S. natural gas volumes. There are currently 23 rigs operating in the basin (3% of the active rigs in the U.S).
  • The Permian basin is located in west Texas and southeastern New Mexico. The basin is currently producing approximately 24% of U.S. crude oil production and 9% of U.S. natural gas volumes. There are presently 319 rigs drilling in the basin (39% of the active rigs in the U.S).
  • The Utica Shale play is located in eastern Ohio, southwestern Pennsylvania, and northwestern West Virginia. The play is currently producing approximately 5% of U.S. natural gas volumes and de minimis volumes of crude oil. There are 22 rigs operating in the play (3% of the active rigs in the U.S).
  • The STACK and SCOOP (South Central Oklahoma Oil Province) plays located in south Central Oklahoma are another important and rapidly growing group that we intend to cover. The EIA does not break out specific production volumes from these plays, but we estimate current production accounting for approximately 2% of U.S. crude oil volumes and approximately 3% of U.S. natural gas production. There are currently 48 rigs operating in this region (6% of the active rigs in the U.S).

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1 Source: Bloomberg, 3/31/17.