The following is what we believe are current issues affecting the midstream MLP market and our outlook for the asset class:
Issues Affecting Current Sentiment and Valuations
- Although MLP share prices are historically not highly correlated with energy prices over the longer term, correlations can rise in shorter term periods.
- Global production will be pressured but is unlikely to decline significantly.
- Some energy producers are distressed but midstream cash flows are typically insulated.
- Current fundamentals of midstream energy infrastructure companies remain strong.
- Debt levels have risen modestly, but they remain close to historical averages.
What Could Go Wrong?
- MLPs could be forced to cut dividends to fund future growth or maintain current distributions at the expense of future growth.
- MLPs could lose access to the capital markets.
- MLPs could lose significant value as the U.S. energy renaissance grinds to a halt.
Our Outlook for MLP Equities
- We suspect that the MLP midstream asset class will likely remain pressured until there are signs that energy prices are stabilizing. We would also expect that there might be additional selling as investors begin to reflect on their year-end statements.
- The fundamentals of the midstream sector appear sound. The sustainability of distributions will be the primary focus in 2016. We believe that current cash flows will be supported as high volumes of commodities continue to be transported and stored.
- We also know that markets can overshoot to the downside when they are driven by momentum and negative sentiment. History also tells us that momentum-based trading patterns eventually reverse course and that fundamentals eventually come back into focus. Unfortunately, the timing of these turns only seems obvious in retrospect.
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Mutual 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. 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. 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.