MLP Market Overview1

MLPs,as measured by the Alerian MLP Index (AMZ), ended April down 2.0% on a price basis and down 1.3% once distributions are considered. The AMZ results underperformed the S&P 500 Index’s 1.0% total return for the month. The best performing MLP subsector for April was the Natural Gas Pipeline group, while Upstream names generated the weakest returns, on average.

For the year through April, the AMZ is up 0.2% on a price basis, resulting in a 2.6% gain on a total return basis. This compares to the S&P 500 Index’s 6.5% and 7.2% 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, were effectively unchanged over the month, exiting the period at 462 bps. This compares to a trailing five-year average spread of 453 bps and the average spread since 2000 of approximately 355 bps. The AMZ indicated distribution yield at month-end was 6.9%.

Midstream MLPs and affiliates raised $1.3 billion of marketed new equity (common and preferred, excluding at-the-market programs) and $0.6 billion of marketed debt during the month. MLPs and affiliates announced approximately $2.0 billion of asset acquisitions during April.

Spot West Texas Intermediate (WTI) crude oil exited the month at $49.33 per barrel, down 2.5% over the period but 7.4% higher year-over-year. Spot natural gas prices ended April at $3.17 per million British thermal units (MMbtu), up 2.2% over the month and 66.0% higher than April 2016. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $23.79 per barrel, 0.2% higher than the end of March and 19.3% higher than the year-ago period.

News

Energy Transfer Partners and Sunoco Logistics Merger Approved and Completed. Unitholders of Energy Transfer Partners (NYSE: ETP) approved its merger with Sunoco Logistics Partners (NYSE: SXL). The combined company, operating as Energy Transfer Partners (NYSE: ETP), will begin trading on May 1, 2017, as the second largest midstream MLP by enterprise value, and is expected to benefit from commercial synergies and cost savings in excess of $200 million annually by 2019.

First-Quarter Reporting Season Begins. First-quarter reporting season began in April. Through month-end, 63 midstream entities had announced distributions for the quarter, including 28 distribution increases, three distribution decreases, and 32 distributions that were unchanged from the fourth quarter. Through the end of April, seven sector participants had reported first-quarter financial results. Operating performance was, on average, better than consensus expectations with Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), coming in 1.3% better than consensus estimates and 1.8% higher than the fourth quarter of 2016.

Williams Sells Geismar. Williams Partners (NYSE: WPZ) announced the sale of its majority interest in the Geismar, LA ethylene cracking facility to NOVA Chemicals for ~$2.1 billion in cash. In conjunction with the sale, WPZ and NOVA will enter into a long-term, fee-based supply and transportation agreement with WPZ providing feedstock to Geismar via its Bayou Ethane pipeline.

Thought of the Month: How the Permian Basin Could Boost Growth Opportunities for Investors

Continuing our series highlighting the major North American shale plays, including their primary characteristics and trends, this month we look at the big kahuna: the Permian Basin. As we noted in last month’s introductory overview, the Permian Basin is located in west Texas and southeastern New Mexico. Drilling activity in the Permian remained relatively strong throughout the energy down cycle and activity has rebounded significantly in recent months. The Basin is currently producing approximately 24% of U.S. crude oil and 9% of U.S. natural gas volumes, and there are presently 340 rigs drilling in the Basin (40% of the active rigs in the U.S).

The Permian Basin consists of three primary sub-basins: The Midland Basin, Delaware Basin, and the Central Basin Platform. At present, the Midland and Delaware sub-basins garner the most excitement and current activity, with most operators primarily focusing on three formations: the Wolfcamp, Spraberry, and Bone Springs (see map above). These formations are stacked like the layers of a cake, and some are productive from multiple intervals, or layers within layers. Further, additional formations and intervals have proven to be productive and several more present future potential.

The Wolfcamp zone recently received mainstream attention when the United States Geological Service (USGS) published a study2 noting that the Wolfcamp shale in the Midland Basin held “the largest estimate of continuous oil that USGS has ever assessed in the United States” which was “nearly three times larger than that of the 2013 USGS Bakken-Three Forks resource assessment.” The USGS found the Wolfcamp held an estimated 20 billion barrels of oil, 16 trillion cubic feet of associated natural gas, and 1.6 billion barrels of natural gas liquids. Importantly, the USGS did not assess the Wolfcamp in the Delaware Basin, thus these already immense figures significantly understate the Wolfcamp’s potential Permian-wide. Further, this analysis covers only the Wolfcamp shale, excluding the multiple other zones already proven, as well as those zones that have been shown to hold hydrocarbons but are as yet unproven to be economically productive. Suffice it to say, the Permian Basin, despite producing oil and natural gas for almost 100 years, remains the dominant source of current and future petroleum production in the United States. It’s a truly special resource that, by some accounts, rivals the prolific Ghawar oil field in Saudi Arabia.3

Therefore, the Permian likely represents significant growth opportunities for energy infrastructure. The Permian will likely require additional storage and takeaway capacity for crude oil, natural gas, and natural gas liquids, as well as added natural gas processing capacity and compression. In fact, the midstream industry has announced numerous organic growth projects year-to-date, as well as several large-scale M&A deals, all focused on the Permian.

For example:

  • Plains All American Pipeline (NYSE: PAA) announced the expansion of its Cactus Pipeline, adding 60 Mbbls/d of capacity to be placed into service during the third quarter of 2017.
  • Magellan Midstream Partners (NYSE: MMP) and PAA announced plans to add 100 Mbbls/d of capacity to the BridgeTex pipeline beginning in the second quarter of 2017.
  • Enterprise Products Partners (NYSE: EPD) advanced an expansion of its Midland to Sealy pipeline and accelerated the planned in-service date.
  • Western Gas Partners (NYSE: WES) announced plans to construct two new natural gas processing plants in the Delaware basin.
  • TexStar Midstream Logistics, Castleton Commodities, and Ironwood Midstream Energy Partners (all private) proposed the EPIC Pipeline, a 730 mile pipeline that would originate in the Permian Basin and terminate in Corpus Christi.
  • Buckeye Partners (NYSE: BPL) also noted planning for a new crude pipeline originating in the Permian Basin and terminating in Corpus Christi.
  • Navigator Energy Services, which was subsequently acquired by NuStar Energy Partners (NYSE: NS), announced that it was expanding the footprint, destination options, storage, and throughput capacity of its Big Spring Gateway Pipeline System.
  • PAA announced the $1.2 billion acquisition of the Alpha Crude Connector gathering system, which is expected to benefit from production growth out of the Delaware sub-basin of the Permian.
  • Targa Resources (NYSE: TRGP) announced the acquisition of Outrigger Energy, providing TRGP with additional crude oil and natural gas gathering and processing scale in the basin, and boosting the partnership’s fee-based business mix.
  • Noble Midstream (NYSE: NBLX) and PAA acquired the Advantage Pipeline and announced plans to expand the system to gather volumes for Noble Energy (NYSE: NBL).

The Bottom Line for Investors

The Permian Basin has clearly reclaimed its status as the crown jewel of the U.S. oil and gas industry, and the newfound immensity of the Permian’s low cost hydrocarbons have stimulated an opportunity for U.S.-produced volumes to gain global market share. This is apparent with major global producers, such as ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), increasingly allocating significant investment capital into the Permian and away from other, international, opportunities. Because of the Permian, U.S. crude oil production has recovered from the recent cyclical lows and while a quicker-than-expected resurgence of domestic shale production may serve to temper the crude price recovery, we note midstream assets should benefit through the resultant volume improvements regardless.

Read more insights and updates on MLPs from OFI SteelPath and Brian Watson and review our suite of MLP products.

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1 Source: Bloomberg, 4/30/17.

2 Assessment of undiscovered continuous oil resources in the Wolfcamp shale of the Midland Basin, Permian Basin Province, United States Geological Service, https://www.usgs.gov/news/usgs-estimates-20-billion-barrels-oil-texas-wolfcamp-shale-formation, November 15, 2016.

3 Pioneer Natural Resources, “Permian Basin Takes Center Stage,” March 2017.