MLPs, as measured by the Alerian MLP Index (AMZ), ended November down 2.8% on a price basis and 1.4% once distributions are considered. The AMZ results underperformed the S&P 500 Index’s 3.1% total return for the month. The best performing MLP subsector for November was the Gathering and Processing group, while the Coal subsector generated the weakest returns, on average.

For the year through November, the AMZ is down 16.9% on a price basis, resulting in a 10.8% loss once distributions are considered. This compares to the S&P 500 Index’s 18.3% and 20.5% 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 16 basis points (bps) over the month, exiting the period at 571 bps. This compares to a trailing five-year average spread of 461 bps and the average spread since 2000 of approximately 361 bps. The AMZ indicated distribution yield at month-end was 8.1%.

Midstream MLPs and affiliates raised $2.4 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 $9.7 billion of asset acquisitions during November.

Spot West Texas Intermediate (WTI) crude oil exited the month at $57.40 per barrel, up 5.6% over the period and 16.1% higher year-over-year. Spot natural gas prices ended November at $2.94 per million British thermal units (MMbtu), up 6.2% over the month and 10.7% lower than November 2016. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $32.16 per barrel, 2.0% lower than the end of October and 35.4% higher than the year-ago period.

News

MPLX Announces Large Final Drop from Parent and Plans to Eliminate IDRs. MPLX LP (NYSE: MPLX) announced an $8.1 billion acquisition of assets from its sponsor, Marathon Petroleum (NYSE: MPC), the final drop of assets expected from MPC. Additionally, MPC offered to exchange its general partner (GP) economic interests in MPLX, which include incentive distribution rights (IDRs), for newly issued MPLX common units. This transaction is now under review by the MPLX Board of Directors and, subject to approval, is expected to close in February 2018, in conjunction with the closing of the aforementioned dropdown.

AMID Acquires SXE. American Midstream Partners (NYSE: AMID) announced the acquisition of Southcross Energy Partners (NYSE: SXE) and certain assets of SXE’s sponsor, Southcross Holdings LP (private), in separate transactions valued at $815 million. AMID expects the transaction to accelerate its transformation into a fully integrated gathering, processing and transmission company focused in select core areas, and will further its strategy of redeploying capital into higher growth businesses while divesting non-core assets.

Third-Quarter Earnings Season Concludes. Third-quarter reporting season effectively concluded in November. Through month-end, 70 midstream entities had announced distributions for the quarter, including 38 distribution increases, three reductions, and 29 distributions that were unchanged from the second quarter. Through the end of November, 68 sector participants had reported third-quarter financial results. Operating performance was, on average, better than consensus expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 2.4% higher than consensus estimates and 5.1% higher than the second quarter of 2017.

Thought of the Month

During the last two years the midstream industry has faced the significant challenge of funding almost $80 billion in organic capital spending against a backdrop of tough energy industry fundamentals and an even more dramatic environment for equity performance. While the massive and expensive buildout of pipelines and other infrastructure needed to accommodate production from the new shale basins appears to be moderating, many attractive organic growth projects remain to be funded. Accordingly, sector participants have taken steps to ease funding concerns and, in some cases, move entirely toward a model that eliminated the need for external equity (i.e., new stock issuance).

More recently, industry bellwether Enterprise Products Partners (NYSE: EPD) elected to reduce the rate at which it was growing its distribution (but still grow it), and direct the retained cash toward funding its backlog of growth projects. Also, Genesis Energy (NYSE: GEL) elected to cut its distribution, and use the retained capital to fund near-term growth spending.

Since late 2014, a significant contributor to MLP equity price weakness has been the uncertainty caused by the large funding needs committed to by midstream providers against a backdrop of equity price dislocation and, at times, debt market turbulence. As a result, EPD’s and GEL’s shift to self-funding might have been expected to lift their respective equity prices. However, the immediate impact appears to have been to spark a new wave of market anxiety as many market commentators are asking if this trend will continue and how much it might change the asset class.

However, a closer look suggests these recent actions are just the latest in a shift that, for the most part, has already happened. Distribution growth metrics for most midstream providers with large funding needs have already moderated, while others have already cut their distributions outright or merged into entities with lower payouts. For reference, 23 midstream-focused MLPs have already reduced their distribution while five entities effectively reduced their cash outlay via intra-family consolidation in which a lower-yielding entity acquired a higher-yielding entity.

As a result, we believe the market’s newfound MLP-focused anxiety is largely backward looking. Further, several key shifts in the midstream sector are also likely to lessen the funding conundrum that has dominated MLP market sentiment in recent years:

First, the extreme levels of capital spending historically required by the midstream sector are moderating and, therefore, so too is the sector’s funding needs. For context, MLPs issued approximately $20 billion to $25 billion in equity in 2017, but 2018 equity needs appear to be falling to approximately $10 billion, with needs for 2019 likely even lower.

Second, the trading price and demand for midstream notes and bonds has normalized, and as a result the pricing and demand for midstream preferred equity has improved as preferred equity typically prices relative to fixed-income issues. Year-to-date, the sector has issued approximately $7 billion in preferred equity, which is helping midstream operators affordably meet funding needs for important projects, without stressing balance sheet health or harming common equity holders by issuing undervalued units.

Third, midstream providers have begun to more commonly seek partners for large projects to aid in funding and de-risk such exposure. Most recently, Kinder Morgan (NYSE: KMI) and Targa Resources (NYSE: TRGP) brought partners into certain projects, while Energy Transfer Partners (NYSE: ETP) has completed joint venture agreements for several projects throughout the year.

Finally, and most importantly, the energy industry macro outlook is much healthier than recent years with most midstream providers likely to experience growing volumes, and therefore margins, across their assets rather than flat or declining volumes. As mentioned above, EBITDA metrics for the sector have begun to reflect healthy year-over-year results. As recent volume trends continue and assets under multi-year construction periods finally enter service and begin to generate revenue, we expect this trend to continue.

Therefore, while it is certainly possible some management teams may still choose to moderate their distribution growth targets or lower their distribution payouts to fund growth projects, we believe we are nearing the end of such strategic funding shifts rather than the beginning. Further, we believe that, over time, such distribution adjustments when pursued to increase funding flexibility will be better received by the market than when distribution adjustments are made in reaction to negative operating fundamentals. Notably, those who slow distribution growth or lower their distribution payout to fund a wave of capital spending are often in a position to return to more normalized distribution growth rates or payout levels within a reasonable period of time. Additionally, it is worth noting that, across this energy down cycle, more midstream providers have actually increased payouts than have cut them.

OFI SteelPath has always focused primarily on a scenario-based valuation of the business’ underlying cash flows, and we believe midstream cash flow growth visibility is improving while valuation relative to those cash flows looks attractive. Taken together, we believe the midstream sector is in a position to benefit from several important tailwinds that market sentiment and equity valuations appear to underestimate. Further, we believe that, as the broader energy markets continue to normalize, these tailwinds may begin to attract greater investor interest and aid in the sector’s recovery.

As of 9/30/17, Oppenheimer SteelPath MLP Alpha Fund’s holdings were 10.25% in Energy Transfer Partners L.P. (NYSE: ETP); 8.52% in Enterprise Products Partners L.P. (NYSE:EPD); 7.25% in Targa Resources Corp. (NYSE:TRGP); 7.06% in MPLX L.P. (NYSE: MPLX); 1.85% in Genesis Energy L.P. (NYSE:GEL); and 0.00% in Kinder Morgan Inc. (NYSE:KMI), American Midstream Partners L.P. (NYSE: AMID), Southcross Energy Partners L.P. (NYSE: SXE) and Marathon Petroleum (NYSE: MPC). 

As of 9/30/17, Oppenheimer SteelPath MLP Alpha Plus Fund’s holdings were 9.96% in Energy Transfer Partners L.P. (NYSE: ETP); 8.41% in Enterprise Products Partners L.P. (NYSE: EPD); 7.23% in Targa Resources Corp. (NYSE:TRGP); 7.20% in MPLX L.P. (NYSE: MPLX); 1.85% in Genesis Energy L.P. (NYSE:GEL); and 0.00% in Kinder Morgan Inc. (NYSE:KMI), American Midstream Partners L.P. (NYSE: AMID), Southcross Energy Partners L.P. (NYSE: SXE) and Marathon Petroleum (NYSE: MPC). 

As of 9/30/17, Oppenheimer SteelPath MLP Income Fund’s holdings were 9.91% in Energy Transfer Partners L.P. (NYSE: ETP); 4.75% in Genesis Energy L.P. (NYSE:GEL); 2.30% in American Midstream Partners L.P. (NYSE: AMID); 2.28% in Targa Resources Corp. (NYSE:TRGP); and 0.00% in Enterprise Products Partners (NYSE: EPD), Kinder Morgan Inc. (NYSE:KMI), MPLX L.P. (NYSE: MPLX), Southcross Energy Partners L.P. (NYSE: SXE) and Marathon Petroleum (NYSE: MPC). 

As of 9/30/17, Oppenheimer SteelPath MLP Select 40 Fund’s holdings were 5.38% in Energy Transfer Partners L.P. (NYSE: ETP); 4.74% in MPLX L.P. (NYSE: MPLX); 4.08% in Genesis Energy L.P. (NYSE:GEL); 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), American Midstream Partners L.P. (NYSE: AMID), Southcross Energy Partners L.P. (NYSE: SXE) and Marathon Petroleum (NYSE: MPC).