Master Limited Partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), ended December up 4.7%. The AMZ results outperformed the S&P 500 Index’s 1.1% total return for the month. The best-performing MLP subsector for December was the Marine group, while the Upstream subsector generated the weakest returns, on average.

For calendar year 2017, the AMZ was down 13.0% on a price basis, resulting in a 6.5% loss once distributions are considered. This compares with the S&P 500 Index’s 19.4% and 21.8% price and total returns, respectively. The Marine group produced the best average total return for the year, while the Upstream subsector lagged.

MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, narrowed by 37 basis points (bps) over the month, exiting the period at 535 bps. This compares with a trailing five-year average spread of 462 bps and the average spread since 2000 of approximately 362 bps. The AMZ-indicated distribution yield at month-end was 7.8%.

Midstream MLPs and affiliates raised $700 million of marketed new equity (common and preferred, excluding at-the-market programs) and $800 million of marketed debt during the month. MLPs and affiliates announced approximately $600 million of asset acquisitions during December.

Spot West Texas Intermediate (WTI) crude oil exited the month at $60.42 per barrel, up 5.3% over the period and 12.5% higher year-over-year. Spot natural gas prices ended December at $2.97 per million British thermal units (MMbtu), up 0.8% over the month and 19.5% lower than December 2016. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $32.99 per barrel, 2.6% higher than the end of November and 13.5% higher than the year-ago period.

News

New Permian to Corpus Pipes Moving Forward. Several major new pipelines from the Permian Basin to the Gulf Coast took meaningful steps forward during December. Kinder Morgan (NYSE:KMI), DCP Midstream (NYSE:DCP), and Targa Resources (NYSE:TRGP) announced a final investment decision (FID) on their joint Gulf Coast Express gas pipeline connecting the Permian Basin to Corpus Christi, TX. The pipeline is expected to be placed into service in late 2019. Additionally, privately held EPIC Pipeline announced that it will proceed with its Permian-to-Corpus Christi crude pipeline, which is also expected to begin service in 2019, and will run alongside EPIC’s NGL pipeline, which is already under construction. Finally, both Plains All American Pipeline (NYSE:PAA) and Buckeye Partners (NYSE:BPL) launched binding open seasons for their respective new Permian-to-Corpus Christi crude pipelines.

CONSOL and Noble Reach Agreement on CNNX, Legal Overhang Lifted. CNX Resources (NYSE:CNX) and Noble Energy (NYSE:NBL) reached an agreement for CNX to acquire NBL’s 50% interest in the entities that hold the general partner and incentive distribution interests of CONE Midstream Partners LP (NYSE:CNNX) for $305 million. As a result of this transaction, CNX will own 100% of the general partner, making CNNX a single-sponsor MLP. CNX and NBL also agreed to release outstanding legal claims. Subsequent to the agreement, CNX announced plans to rebrand the collective entities, including changing the name of CONE Midstream Partners LP to CNX Midstream Partners LP, and changing the ticker symbol from CNNX to CNXM.

Tellurian Reaching Further into Producing Regions. Tellurian (NYSE:TELL), the developer of the planned Driftwood LNG export facility, announced plans to develop the Tellurian Pipeline Network. This network would include natural gas pipelines from the Permian Basin in West Texas, the Haynesville shale in northwestern Louisiana, and the previously announced Driftwood Pipeline (DWPL). It would connect the Driftwood LNG facility to the terminus of the new lines as well as multiple other interstate natural gas pipelines. DWPL is anticipated to be in-service by mid-2021; the two additional pipelines are projected to be in-service by the end of 2022, subject to commercialization.

Thought of the Month

2017 proved to be a year of contradiction for the midstream energy sector. Over the year, underlying fundamentals generally improved as firming commodity prices supported producer customers, healthy demand followed improved economic conditions, and U.S. petroleum and natural gas exports continued to expand. On average, midstream EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) grew consistently during 2017, and we believe continued improvement is likely. For example, first-quarter 2017 EBITDA was 1.6% higher than the fourth quarter of 2016, second-quarter 2017 EBITDA grew a modest 0.1%, and the third-quarter figure was up another 5.1%. Further, a number of individual midstream operators executed corporate action to improve leverage metrics, reduce cost-of-capital concerns, and mitigate project risk. Contradictorily, in our view, midstream equity prices struggled over much of the year. In fact, despite December’s rebound, midstream equity prices sit at historically low levels and trading multiples.

Major Corporate Realignments

Below we identify some of the important actions sector participants took during 2017 to improve positioning and grow their business:

  • DCP Midstream (NYSE:DCP) acquired the remaining physical assets of its parent, providing scale, more attractive basin diversity, and increased organic investment opportunities.
  • Enbridge (NYSE:ENB) announced the take-in of daughter entity Midcoast Energy Partners (NYSE:MEP) along with asset shuffling with Enbridge Energy Partners (NYSE:EEP).
  • Energy Transfer Partners (NYSE:ETP) merged with its sister MLP, Sunoco Logistics Partners (NYSE:SXL). At the time of the merger the combined company, operating as Energy Transfer Partners (NYSE:ETP), became the second-largest midstream MLP by enterprise value and is expected to benefit from commercial synergies and annual cost savings in excess of $200 million by 2019.
  • Marathon Petroleum (NYSE:MPC) accelerated drop-downs of assets to MPLX (NYSE:MPLX) and an agreement to exchange its economic interests in the general partner of MPLX, including the incentive distribution rights, for newly issued MPLX common units in conjunction with the completion of the drop-downs.
  • ONEOK, Inc. (NYSE:OKE) acquired its daughter entity, ONEOK Partners, LP (NYSE:OKS), eliminating the incentive distribution rights.
  • Williams (NYSE:WMB) and Williams Partners (NYSE:WPZ) executed simplification plans that included permanent elimination of the incentive distribution rights.

Balance Sheet Improvement and Capital Spending Alleviation

  • ETP announced the sale of a 32% stake in the Rover pipeline, currently completing construction, to Blackstone, a private equity firm, for $1.6 billion.
  • Enterprise Products Partners (NYSE:EPD) elected to slow distribution growth (but still grow) and direct the retained funds toward its large backlog of growth projects, rather than raise equity capital at depressed valuations.
  • Genesis Energy (NYSE:GEL) chose to reduce its distribution to fund growth capital, judging the company’s equity valuation, and resulting distribution yield, as not reflective of the partnership’s growth potential, and thereby removing plans for near-term equity financing.
  • 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.

Notable Organic Growth Projects

  • Enterprise Products Partners (NYSE:EPD) formally moved forward with the Midland to Sealy pipeline expansion and accelerated the planed in-service date. EPD also announced plans to construct a new isobutane dehydrogenation unit (a facility that converts a natural gas liquid, isobutane, into isobutylene to be used as a feedstock to manufacture lubricants, rubber products and gasoline additives) in Mont Belvieu, Texas.
  • Energy Transfer Partners (NYSE:ETP) announced plans to build a fifth fractionator at Mont Belvieu.
  • Sunoco Logistics Partners (NYSE:SXL) began an expansion of its Mariner East 2 system.
  • After well-publicized controversy and politicized delay, Energy Transfer Partner’s (NYSE:ETP) Dakota Access Pipeline was placed into commercial service in late May.
  • Kinder Morgan (NYSE:KMI), DCP Midstream (NYSE:DCP), and Targa Resources (NYSE:TRGP) announced a FID on their joint Gulf Coast Express gas pipeline which is expected to be placed into service in late 2019.
  • EPIC Pipeline (Private) announced that it will proceed with its Permian to Corpus crude pipeline, also expected to begin service in 2019.

In short, we believe midstream equity valuations are attractive and sector participants have improved their positioning for the future. While the AMZ is above the cyclical low, it sits at levels present before the emergence of oil shale production despite production volumes and cash flows that have risen significantly and, unlike the pre-shale environment, organic growth is a viable possibility.

Further, the massive, and expensive, buildout of pipelines and other infrastructure needed to accommodate the new shale production also appears to be moderating, thus reducing the need for large amounts of fickle external capital. With a new year upon us, and many of the technical issues waning, we believe the stage is set for a realignment of business and equity fundamentals, which will position the sector well for long-term investors seeking an attractive blend of current income, moderate growth and, presently, attractive valuations.

 

As of 12/31/2017, Oppenheimer SteelPath MLP Income Fund's holdings were 10.61% in Energy Transfer Partners LP (NYSE:ETP); 6.04% in Buckeye Partners LP (NYSE:BPL); 5.46% in Genesis Energy LP (NYSE:GEL); 5.06% in DCP Midstream (NSYE: DCP); 3.88% in Enbridge Energy Partners (NYSE:EEP); 2.51% in Targa Resources Corp (NYSE:TRGP); 0.84% in Williams Partners LP (NYSE:WPZ), and 0.00% in MPLX LP (NYSE:MPLX), Williams Inc. (NYSE:WMB), Plains All American Pipeline (NYSE:PAA), Kinder Morgan Inc. (NYSE:KMI), CNX Resources (NYSE:CNX), CONE Midstream Partners LP (NYSE:CNNX), Tellurian (NYSE:TELL), Noble Energy (NYSE:NBL), Midcoast Energy Partners (NYSE:MEP), Sunoco Logistics Partners (NYSE:SXL), Marathon Petroleum (NYSE:MPC), Enterprise Product Partners LP (NYSE EPD), ONEOK, Inc. (NYSE:OKE) and ONEOK Partners LP (NYSE:OKS).

As of 12/31/2017, Oppenheimer SteelPath MLP Select 40 Fund's holdings were 5.56% in Energy Transfer Partners LP (NYSE:ETP); 5.11% in Enterprise Product Partners LP (NYSE EPD); 4.88% in MPLX LP (NYSE:MPLX); 4.65% in Buckeye Partners LP (NYSE:BPL); 3.52% in Genesis Energy LP (NYSE:GEL); 3.46% in Williams Partners LP (NYSE:WPZ); 3.24% in Targa Resources Corp (NYSE:TRGP); 3.02% in ONEOK, Inc. (NYSE:OKE); 2.48% in DCP Midstream (NSYE: DCP); 1.42% in Enbridge Energy Partners (NYSE:EEP); 0.55% in CONE Midstream Partners LP (NYSE:CNNX), and 0.00% in Williams Inc. (NYSE:WMB), Plains All American Pipeline (NYSE:PAA), Kinder Morgan Inc. (NYSE:KMI), CNX Resources (NYSE:CNX), Tellurian (NYSE:TELL), Noble Energy (NYSE:NBL), Midcoast Energy Partners (NYSE:MEP), Sunoco Logistics Partners (NYSE:SXL), Marathon Petroleum (NYSE:MPC), and ONEOK Partners LP (NYSE:OKS).

As of 12/31/2017, Oppenheimer SteelPath MLP Alpha Plus Fund's holdings were 10.37% in Enterprise Product Partners LP (NYSE:EPD); 10.31% in Energy Transfer Partners LP (NYSE:ETP); 7.62% in MPLX LP (NYSE:MPLX); 7.46% in Targa Resources Corp. (NYSE:TRGP); 6.37% in Buckeye Partners LP (NYSE:BPL); 4.88% in Williams Partners LP (NYSE:WPZ); 2.47% in Williams Inc. (NYSE:WMB); 2.23% in Plains All American Pipeline (NYSE:PAA); 1.46% in Genesis Energy LP (NYSE:GEL) and 0.00% in Kinder Morgan Inc. (NYSE:KMI), DCP Midstream (NSYE: DCP), CNX Resources (NYSE:CNX), CONE Midstream Partners LP (NYSE:CNNX), Tellurian (NYSE:TELL), Noble Energy (NYSE:NBL), Midcoast Energy Partners (NYSE:MEP), Enbridge Energy Partners (NYSE:EEP), Sunoco Logistics Partners (NYSE:SXL), Marathon Petroleum (NYSE:MPC), ONEOK, Inc. (NYSE:OKE) and ONEOK Partners LP (NYSE:OKS).

As of 12/31/2017, Oppenheimer SteelPath MLP & Energy Infrastructure Fund's holdings were 9.28% in Williams Inc. (NYSE:WMB); 6.43% in Targa Resources Corp (NYSE:TRGP); 5.77% in ONEOK, Inc. (NYSE:OKE); 4.85% in Enterprise Product Partners LP (NYSE:EPD); 3.80% in MPLX LP (NYSE:MPLX); 2.82% in Energy Transfer Partners LP (NYSE:ETP); 0.99% in Buckeye Partners LP (NYSE:BPL); 0.47% in DCP Midstream (NSYE: DCP); 0.46% in Genesis Energy LP (NYSE:GEL), and 0.00% in Williams Partners LP (NYSE:WPZ), Plains All American Pipeline (NYSE:PAA), Kinder Morgan Inc. (NYSE:KMI), CNX Resources (NYSE:CNX), CONE Midstream Partners LP (NYSE:CNNX), Tellurian (NYSE:TELL), Noble Energy (NYSE:NBL), Midcoast Energy Partners (NYSE:MEP), Enbridge Energy Partners (NYSE:EEP), Sunoco Logistics Partners (NYSE:SXL), Marathon Petroleum (NYSE:MPC), and ONEOK Partners LP (NYSE:OKS).