Master Limited Partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), ended August down 5.9% on a price basis and 4.9% once distributions are considered. The AMZ results underperformed the S&P 500 Index’s 0.3% total return for the month. The best performing MLP subsector for August was the Propane group, while the Upstream subsector generated the weakest returns, on average.

Year-to-date through the end of August, the AMZ is down 11.0% on a price basis, resulting in a 6.3% loss once distributions are considered. This compares with the S&P 500 Index’s 10.4% and 11.9% 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 54 basis points (bps) over the month, exiting the period at 555 bps. This compares with a trailing five-year average spread of 456 bps and the average spread of approximately 358 bps since 2000. The AMZ indicated distribution yield at month-end was 7.7%.

 

Midstream MLPs and affiliates raised $2.6 billion of marketed new equity (common and preferred, excluding at-the-market programs) and $1.7 billion of marketed debt during the month. MLPs and affiliates announced approximately $2.0 billion of asset acquisitions during August.

 

Spot West Texas Intermediate (WTI) crude oil exited the month at $47.23 per barrel, down 5.9% over the period, but 5.7% higher year-over-year. Spot natural gas prices ended August at $2.89 per million British thermal units (MMbtu), up 2.1% for the month and 1.6% lower than August 2016. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $27.46 per barrel, 2.8% higher than the end of July and 47.1% higher than the same period one year ago.

News

Second-Quarter Earnings Season Concludes. Second-quarter reporting season essentially concluded in August. Through month-end:

  • 71 midstream entities had announced distributions for the quarter, including 30 distribution increases, one reduction, and 40 that were unchanged from the first quarter.
  • 69 sector participants had reported second-quarter financial results. Operating performance was, on average, modestly below consensus expectations, with Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) coming in 0.7% lower than consensus estimates and 0.1% higher than the first quarter of 2017.

FERC Quorum Restored. The U.S. Senate confirmed two Federal Energy Regulatory Commission (FERC) commissioners in early August, restoring FERC’s quorum to vote on project approvals for the first time since February 2017. The reinvigorated commission got to work quickly, approving the NEXUS pipeline project, which is an approximately 255-mile natural gas pipeline with the capacity to transport up to 1.5 billion cubic feet per day (Bcf/d) of natural gas from eastern Ohio to southeastern Michigan.

 

Portions of Rover Pipeline and Atlantic Sunrise Project Approved to Begin Service. Energy Transfer Partners (NYSE: ETP) announced that the FERC approved its request to put Phase 1A, a 212-mile section of the Rover Pipeline in eastern Ohio, into service beginning August 31, 2017. The approximately 713-mile pipeline is designed to transport 3.25 billion cubic feet of natural gas per day from the Marcellus and Utica Shale production areas to markets across the United States, as well as into the Union Gas Dawn Storage Hub in Ontario, Canada. Additional phases are expected to be placed into service later in 2017. Additionally, Williams Partners L.P. (NYSE: WPZ) received FERC approval to place a portion of the Atlantic Sunrise project into service beginning September 1, 2017. The complete Atlantic Sunrise project, connecting Marcellus gas supplies with markets in the Mid-Atlantic and Southeastern U.S., will involve significant additional construction, with greenfield construction in Pennsylvania expected to begin this fall.

Thought of the Month

Midstream sector equities continue to be challenged by anemic capital flows and pervasively negative sentiment among market participants toward all things energy. This equity price weakness is frustrating, as commodity price weakness reflects, in part, resilient U.S. production volumes, which should benefit midstream revenues. Furthermore, midstream equity valuations appear attractive. Some recent sector-specific events have not helped sentiment and, as discussed below, we believe each has unduly weighed on the whole group.

 

While most energy infrastructure appears to have escaped the wind and storm surge damage wrought by Hurricane Harvey, the extraordinary flooding that has transpired will certainly have some impact. The storm and resultant flooding has shut-in refineries, port facilities, processing plants, fractionators, terminals, and storage facilities. However, reports thus far indicate these disruptions are likely transitory, with most facilities expected to return to service in a few days to a few weeks. As such, we believe the storm’s impact on midstream operators with assets in the region will likely be modest.

 

Prior to Hurricane Harvey, another blunder, in our view, from the Plains All American Pipeline family (NYSE: PAA and NYSE: PAGP) weighed heavily on midstream sentiment. The bellwether crude oil pipeline operator reduced cash flow guidance and announced plans to reduce its distribution payout – its second distribution cut in less than two years. Recall that Plains’ previous cut came in conjunction with a buyout of the partnership’s incentive distribution rights (IDRs), thus making the buyout significantly more pricey than it appeared at the time, with the recent distribution cut implying the original IDR buyout multiple was significantly understated (for our analysis at the time, please see our blog When Incentive Distribution Rights Fail from August 2016).

 

It is important to note that we do not believe the issues at Plains should be viewed as a harbinger of things to come for the midstream space, but rather as an isolated case of a management team that was not conservative enough in their planning and market guidance amidst a prolonged energy down-cycle. For reference, data provided by the midstream team at Baird show that of the AMZ members that provided EBITDA guidance, 72% maintained or increased expectations for the year; of the 28% that reduced their outlook, Plains reduced it the most.1 However, we believe that, on the whole, the proverbial bandage has been ripped off and Plains is now better positioned to fund its substantial backlog of projects and capitalize on future growth opportunities.

 

We believe that midstream companies may benefit from the ongoing resurgence of domestic hydrocarbon production and the more efficient use of existing assets with available capacity, in contrast to the extensive need to construct new assets during the early years of shale development. In our view, current market valuations underestimate the potential for renewed business growth going forward, and we remain optimistic about the sector’s prospects.

 

Consequently, we believe midstream MLPs continue to offer long-term investors attractive total return prospects based on the potential for price appreciation and stable or growing distribution streams.

Follow @OppFunds for more news and commentary. 

 
  1. ^ Source: Robert W. Baird & Co. Inc., August 2017.

As of 6/30/17, Oppenheimer SteelPath MLP Alpha Fund’s holdings were 11.27% in Energy Transfer Partners (NYSE:ETP); 4.98% in Williams Partners LP (NYSE:WPZ); 3.59% in Plains GP Holdings (NYSE:PAGP); and 3.04% in Plains All American Pipeline (NYSE:PAA).

As of 6/30/17, Oppenheimer SteelPath MLP Alpha Plus Fund’s holdings were 11.24% in Energy Transfer Partners (NYSE:ETP); 5.00% in Williams Partners LP (NYSE:WPZ); 3.55% in Plains GP Holdings (NYSE:PAGP); and 3.05% in Plains All American Pipeline (NYSE:PAA).

As of 6/30/17, Oppenheimer SteelPath MLP Income Fund’s holdings were 10.21% in Energy Transfer Partners (NYSE:ETP); 2.94% in Williams Partners LP (NYSE:WPZ); and 0.00% in both Plains GP Holdings (NYSE:PAGP) and Plains All American Pipeline (NYSE:PAA).

As of 6/30/17, Oppenheimer SteelPath MLP Select 40 Fund’s holdings were 5.89% in Energy Transfer Partners (NYSE:ETP); 3.54% in Williams Partners LP (NYSE:WPZ); 0.73% in Plains GP Holdings (NYSE:PAGP); and 0.57% in Plains All American Pipeline (NYSE:PAA).