MLP Market Overview1

Master limited partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), ended June down 0.6% on both a price and total return basis. The AMZ results underperformed the S&P 500 Index’s 0.6% total return for the month. The best-performing MLP subsector for June was the Diversified group, while the Upstream subsector generated the weakest returns, on average.

Year-to-date through June, the AMZ is down 5.9% on a price basis, resulting in a 2.7% loss once distributions are considered. This compares with the S&P 500 Index’s 8.2% price gain and 9.4% total return. 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 7 basis points (bps) over the month, exiting the period at 529 bps. This compares with a trailing five-year average spread of 454 bps and the average spread since 2000 of approximately 356 bps. The AMZ indicated distribution yield at month-end was 7.5%.

Midstream MLPs and affiliates raised $0.3 billion of marketed new equity (common and preferred, excluding at-the-market programs) and $0.4 billion of marketed debt during the month. MLPs and affiliates announced approximately $2.4 billion of asset acquisitions during June.

Spot West Texas Intermediate (WTI) crude oil exited the month at $46.04 per barrel, down 4.7% over the period and 4.7% lower year-over-year. Spot natural gas prices ended June at $2.94 per million British thermal units (MMbtu), down 1.8% over the month and 1.5% higher than June 2016. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $23.00 per barrel, 3.2% lower than the end of May and 8.7% higher than the year-ago period.

News

ENLK and OKE Partner for Oklahoma NGL Solution. EnLink Midstream Partners (NYSE: ENLK) and ONEOK Inc. (NYSE: OKE) announced a long-term agreement to transport NGLs from Central Oklahoma to the Gulf Coast. The mutually beneficial deal leverages OKE’s existing assets to provide incremental growth for each company by delivering volumes to each company’s downstream assets. OKE will expand its Arbuckle and Sterling systems by late 2018 to accommodate the increased volumes.

Alerian Index Changes. Noble Midstream Partners (NYSE: NBLX) was added to the AMZ and Alerian MLP Equal Weight Index (AMZE), while Terra Nitrogen Company (NYSE: TNH) and Teekay Offshore Partners (NYSE: TOO) were removed. Additionally, Alerian announced plans to remove ONEOK Partners, LP (NYSE: OKS) from the AMZ, AMZE, Alerian MLP Infrastructure Index (AMZI), Alerian Large Cap MLP Index (AMLI), and the Alerian Natural Gas MLP Index (ANGI), to be followed by a special rebalancing of each index. OKS is being acquired by its parent, OKE, after approval by shareholders and unitholders on June 30, 2017. Following the merger, the company expects dividend growth of 9% to 11% annually through 2021, and annual dividend coverage greater than 1.2x.

Crude Oil Production vs. Price: What Matters to MLPs?

In mid-June, we published a blog stating our belief that crude price volatility has overshadowed positive lower 48 crude oil production trends for the midstream asset class, and our expectation that, as crude price volatility begins to ebb, investors may begin to focus on these production trends. We also noted that, despite the improving outlook for volume and distribution growth, midstream companies are trading at historically attractive valuation levels.

Thought of the Month

Continuing our series highlighting the major North American shale plays, including their primary characteristics and trends, this month we look at the SCOOP (South Central Oklahoma Oil Province) and STACK (Sooner Trend Anadarko Basin Canadian and Kingfisher Counties) plays in Central Oklahoma.

MLPs Lag S&P 500 Through June

The STACK play is located in Central Oklahoma. Immediately south of the STACK play is the SCOOP. Both plays are characterized by having distinct areas that produce only natural gas (the “dry gas window”), a blend of natural gas, natural gas liquids, and condensate (the “wet gas window”), or a blend of natural gas, natural gas liquids, and crude oil (the “oil window”), though the STACK appears to hold more oil potential than the SCOOP.

The STACK play is primarily targeting a productive zone known as the Meramec, while the Woodford shale is also prolific, albeit with a much higher natural gas mix. Production from the SCOOP play comes primarily from the Woodford shale, with additional volumes coming from the Springer shale and newfound potential from the Sycamore shale.

The SCOOP was established as an oil and gas play first, in 2012 and 2013, while the STACK began to flourish in 2013 and 2014. Certain characteristics of the STACK, most notably drilling requirements to hold leases and its higher oil content, drove a shift of activity from the SCOOP to the STACK, but in recent months both plays have seen increasing activity. In both plays, there are a total of just under 100 active rigs, about two-thirds of which are in the STACK. Given the relative early stage of development of both the SCOOP and the STACK, we estimate current production from the two plays account for approximately 2% of U.S. crude oil volumes and approximately 3% of U.S. natural gas production, though production is increasing rapidly.

Because the SCOOP and STACK plays sit in an area with a long history of oil and natural gas production, legacy infrastructure was in-place to meet early midstream demand. However, the prolific growth, even amid a commodity down-cycle, has begun to drive demand for new infrastructure, creating meaningful growth opportunities mostly for incumbent midstream providers. Recent or significant project announcements include:

  • EnLink Midstream Partners and OKE announced a long-term agreement to transport NGLs from Central Oklahoma to the Gulf Coast. This mutually beneficial deal leverages OKE’s existing assets to provide incremental growth for each company by delivering volumes to each company’s downstream assets. OKE will expand its Arbuckle and Sterling systems by 2018 to accommodate the volumes (June 2017).
  • Enable Midstream Partners (NYSE: ENBL) and Energy Transfer Partners (NYSE: ETP) announced Project Wildcat, a plan to deliver rich gas produced from the SCOOP and STACK plays to ETP’s existing Godley natural gas processing plant in north Texas, allowing the natural gas to be sold into the Texas intrastate natural gas markets, including the Tolar Hub. The project is expected to be in service by the end of the second quarter of 2018 (May 2017).
  • EnLink commenced operations at the Chisholm II facility in the STACK play, adding 200 million cubic feet per day (MMcf/d) of processing capacity to the Chisholm complex and expects the Chisholm III plant (also 200 MMcf/d) to be operational during the fourth quarter of 2017 (April 2017).
  • Cheniere Energy (NYSE: LNG) announced plans for the Midship Pipeline, a 200-mile natural gas pipeline connecting the SCOOP and STACK plays to the Gulf coast and southeast markets with a targeted in-service date of early 2019.
  • ENBL announced the Cana and STACK Expansion (CaSE) project to expand its Enable Oklahoma Intrastate Transmission (EOIT) system to transport natural gas production from the SCOOP and STACK plays to premium southeast and western natural gas markets (March 2017).
  • Plains All American Pipeline (NYSE: PAA) and Phillips 66 Partners (NYSE: PSXP) announced the formation of a joint venture that will expand the capacity of an existing pipeline from 100,000 barrels per day to 250,000 barrels per day by late 2017, with opportunities to further expand the line to 350,000 barrels per day should demand dictate (August 2016).

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  1. ^ Source: Bloomberg, 07/05/17