Midstream master limited partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), ended July down 0.9% on a price basis and down 0.3% once distributions were considered. That trailed the S&P 500 Index’s 1.4% total return for the month. The Petroleum Pipeline group lead the midstream subsector in July, while the Natural Gas Pipeline subsector underperformed.
For the year through July, the AMZ is up 11.3% on a price basis and 16.6% in total returns. This trails the S&P 500 Index’s 18.9% and 20.2% price and total returns, respectively. The Compression group has produced the best average total returns year-to-date, while the Natural Gas Pipeline subsector has lagged.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year US Treasury Bond, widened by a single basis point (bps) over the month and exited the period at 598 bps. This exceeds the trailing five-year average spread of 522 bps and the average spread since 2000 of approximately 376 bps. The AMZ indicated the distribution yield at month-end was 8.0%.
Midstream MLPs and affiliates raised $0.4 billion of new marketed equity (common or preferred, excluding at-the-market programs) and $2.9 billion of marketed debt over the month. MLPs and affiliates announced no new asset acquisitions in July, though two previously announced consolidations were completed.
Spot West Texas Intermediate (WTI) crude oil exited the month at $58.58 per barrel, up 0.2% for the period but 14.8% lower year-over-year. Spot natural gas prices ended July at $2.28 per million British thermal units (MMbtu), down 5.8% over the month and 19.0% lower than July 2018. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $18.29 per barrel, 6.0% lower than the end of June and 48.5% lower than the year-ago period.
EPD Moving Forward with First New Offshore Oil Export Terminal. Enterprise Products Partners (NYSE: EPD) announced a long-term agreement with Chevron (NYSE: CVX) to help develop its Sea Port Oil Terminal (SPOT) offshore export terminal, a fixed platform located approximately 30 nautical miles off the Brazoria County, Texas coast designed to load Very Large Crude Carriers (VLCCs) at up to 2 million barrels per day. SPOT is the first of five proposed offshore export facilities to reach a final investment decision and is subject to approval by the Maritime Administration (MARAD), an agency within the US Department of Transportation that deals with waterborne transportation.
PSXP Eliminates IDRs. Phillips 66 (NYSE: PSX) and Phillips 66 Partners (NYSE: PSXP) agreed to eliminate incentive distribution rights (IDRs) and general partner (GP) economic interests in PSXP in exchange for 101 million newly issued PSXP common units. Following the close of the transaction, PSX will hold a non-economic GP interest in PSXP and own approximately 170 million PSXP common units, about a 75% stake in PSXP’s outstanding common units.
Secord Quarter Earnings Season Begins. Second-quarter earnings season kicked-off in July. Through month-end, 51 midstream entities had announced distributions for the quarter, including 22 distribution increases and 29 distributions that were unchanged from the previous quarter. Through the end of July, 19 sector participants had reported second-quarter financial results. Operating performance has, on average, beat expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, coming in 2.3% higher than consensus estimates and 0.7% higher than the previous quarter.
Chart of the Month
While crude oil prices remain highly volatile, the actual real-time inventory trends in the US have been supportive for much of this year. To be clear, crude inventories generally follow a seasonal pattern with some growth/stockpiling early in the year before demand picks up in the summer. However, the data from the Energy Information Administration (EIA) shows that these crude inventory builds were well below the seasonal averages from January through March. After a bit of “catching up” in April and May, the inventory data again shifted bullishly this summer. In fact, crude inventory draws during July was the highest on record.
Figure 1: US Crude Inventory Changes, by Month
Source: U.S. Energy Information Administration and SteelPath 7/31/2019.
Blog header image: Avigator Fortuner / Shutterstock.com
The mention of specific companies does not constitute a recommendation by Invesco Distributors, Inc. Certain Invesco funds may hold the securities of the companies mentioned. A list of the top 10 holdings of each fund can be found by visiting invesco.com.
The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. The S&P 500 Index is a broad-based measure of domestic stock market performance. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.
Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Each fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. Diversification does not guarantee profit or protect against loss.
The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.