Master Limited Partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), ended October down 4.6% on a price basis and 4.1% once distributions are considered. The AMZ underperformed the S&P 500 Index’s 2.3% total return for the month. The best-performing MLP subsector for October was the Coal group, while the Petroleum Pipeline subsector generated the weakest returns, on average.

For the year through October, the AMZ is down 14.5% on a price basis, resulting in a 9.5% loss once distributions are considered. This compares to the S&P 500 Index’s 15.0% and 16.9% price and total returns, respectively. The Marine 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 25 basis points (bps) over the month, exiting the period at 554 bps. This compares to a trailing five-year average spread of 459 bps and the average spread since 2000 of approximately 360 bps. The AMZ indicated distribution yield at month-end was 7.9%.

Midstream MLPs and affiliates raised $1.8 billion of marketed new equity (common and preferred, excluding at-the-market programs) and $2.6 billion of marketed debt during the month. MLPs and affiliates announced approximately $0.6 billion of asset acquisitions during October.

Spot West Texas Intermediate (WTI) crude oil exited the month at $54.38 per barrel, up 5.2% over the period and 16.0% higher year-over-year. Spot natural gas prices ended October at $2.77 per million British thermal units (MMbtu), down 4.1% over the month and 0.8% lower than October 2016. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $32.82 per barrel, 5.0% higher than the end of September and 43.5% higher than the year-ago period.

News

Several Companies Take Steps to Lessen External Capital Needs. Capital flows into the sector remained lackluster in October and several industry participants took steps to lessen external capital needs during the month. Enterprise Products Partners (NYSE:EPD) elected to slow distribution growth (but still positive) and direct the retained funds toward its large backlog of growth projects, rather than raise equity capital at current depressed valuations. Genesis Energy’s (NYSE:GEL) depressed equity valuation, and resultant high distribution yield, led the partnership to reduce its distribution payout. The partnership will use the retained cash flow to fund growth capital spending, thereby canceling plans for near-term equity financing. Finally, Kinder Morgan (NYSE:KMI) and Targa Resources (NYSE:TRGP) each announced joint ventures for individual, large-scale growth projects, bringing in partners to share in the project economics.

Holly Simplifies. Holly Energy Partners (NYSE:HEP) and its sponsor, HollyFrontier (NYSE:HFC), announced and completed a transaction to eliminate HEP’s incentive distribution rights (IDRs) via an exchange of the rights for units of HEP. The transaction will simplify the partnership’s structure and is expected to reduce HEP’s cost of capital, allowing the partnership to better compete for new projects.

Third-Quarter Earnings Season Begins. Third-quarter reporting season kicked off in October. Through month-end, 61 midstream entities had announced distributions for the quarter, including 27 distribution increases, three reductions, and 31 that were unchanged from the second quarter. Through the end of October, 18 sector participants had reported second-quarter financial results. Operating performance was, on average, better than consensus expectations with Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), coming in 1.9% higher than consensus estimates and 5.1% higher than the second quarter of 2017.

Thought of the Month

Observing a chart of the AMZ might well lead to the conclusion that the midstream sector must be facing significant headwinds. In fact, the index is currently trading within the range seen before the emergence of oil shale production—a period when midstream growth prospects were opaque for most operators. But we believe this perception of fundamental headwinds is incorrect.

In analyzing the sector's underlying business drivers, we believe midstream operators are set to benefit from several tailwinds rather than being slowed by headwinds. Out of the energy industry’s extreme turbulence caused by the cyclical break in oil prices that began in late 2014, a new normal appears to have emerged. In this new-normal environment, crude oil prices are likely to stay significantly below pre-break levels while U.S. shale producers appear capable of delivering moderate production growth nonetheless.

Under these conditions, we see midstream assets benefiting from a durable period of volume growth. Further, the massive and expensive buildout of pipelines and other infrastructure needed to accommodate the new shale production basins also appears to be moderating.

As a result, we believe many midstream operators sit in the enviable position of having the capacity to flow growing volumes through existing assets rather than needing to fund large new capacity additions. Therefore, as the energy markets continue to normalize, the midstream sector appears poised to offer viable business growth at attractive valuations.

For more details, please see our recent whitepaper, Have MLP and Midstream Headwinds Shifted to Tailwinds?

 

As of 9/30/17, Oppenheimer SteelPath MLP Alpha Fund’s holdings were 8.52% in Enterprise Products Partners L.P. (NYSE:EPD); 7.25% in Targa Resources Corp. (NYSE:TRGP); 1.85% in Genesis Energy L.P. (NYSE:GEL); and 0.00% in Kinder Morgan Inc. (NYSE:KMI), Holly Energy Partners L.P. (NYSE:HEP), and Holly Frontier Corp. (NYSE:HFC).

As of 9/30/17, Oppenheimer SteelPath MLP Alpha Plus Fund’s holdings were 8.41% in Enterprise Products Partners L.P. (NYSE: EPD); 7.23% in Targa Resources Corp. (NYSE:TRGP); 1.85% in Genesis Energy L.P. (NYSE:GEL); and 0.00% in Kinder Morgan Inc. (NYSE:KMI), Holly Energy Partners L.P. (NYSE:HEP), and Holly Frontier Corp. (NYSE:HFC).

As of 9/30/17, Oppenheimer SteelPath MLP Income Fund’s holdings were 4.75% in Genesis Energy L.P. (NYSE:GEL); 2.28% in Targa Resources Corp. (NYSE:TRGP); 1.24% in Holly Energy Partners L.P. (NYSE:HEP); and 0.00% in Enterprise Products Partners (NYSE: EPD), Kinder Morgan Inc. (NYSE:KMI), and Holly Frontier Corp. (NYSE:HFC).

As of 9/30/17, Oppenheimer SteelPath MLP Select 40 Fund’s holdings were 4.08% in Genesis Energy L.P. (NYSE:GEL); 4.02% in Holly Energy Partners L.P. (NYSE:HEP); 3.68% in Enterprise Products Partners (NYSE: EPD); 2.83% in Targa Resources Corp. (NYSE:TRGP); and 0.00% in Kinder Morgan Inc. (NYSE:KMI) and Holly Frontier Corp. (NYSE:HFC).