MLPs, as measured by the Alerian MLP Index (AMZ), ended February down 0.9% on a price basis, but up 0.3% once distributions are considered. The AMZ results underperformed the S&P 500 Index’s 3.2% total return for the month. The best performing MLP subsector for February was the Compression group, while the Petroleum Pipeline subsector underperformed, on average.

For the year through February, the AMZ is up 10.7% on a price basis, resulting in a 12.9% total return. This compares to the S&P 500 Index’s 11.1% and 11.5% price and total returns, respectively. The Propane group has produced the best average total return 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 U.S. Treasury Bond, narrowed by 10 basis points (bps) over the month, exiting the period at 559 bps. This compares to the trailing five-year average spread of 501 bps and the average spread since 2000 of approximately 372 bps. The AMZ indicated distribution yield at month-end was 8.3%.

Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $1.4 billion of marketed debt during the month. MLPs and affiliates announced no asset acquisitions over the month.

Spot West Texas Intermediate (WTI) crude oil exited the month at $57.22 per barrel, up 6.4% over the period and 7.2% lower year-over-year. Spot natural gas prices ended February at $2.97 per million British thermal units (MMbtu), up 4.2% over the month and 11.7% higher than February 2018. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $26.60 per barrel, 1.4% lower than the end of January and 8.8% lower than the year-ago period.

News

Fourth-Quarter Earnings Season Nears Completion. Fourth-quarter reporting season mostly wrapped-up in February. Through month-end, 66 midstream entities had announced distributions for the quarter, including 25 distribution increases, 6 reductions, and 35 distributions that were unchanged from the previous quarter. Through the end of February, 54 sector participants had reported fourth-quarter financial results. Operating performance has been, on average, better than expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 3.1% higher than consensus estimates and 5.4% greater than the preceding quarter.

IDRs Eliminations and Corporate Consolidations Continue. PBF Logistics (NYSE: PBFX) announced an agreement to eliminate its incentive distribution rights (IDRs) in exchange for the issuance of 10 million units to its sponsor PBF Energy (NYSE: PBF). EQM Midstream Partners (NYSE: EQM) and Equitrans Midstream (NYSE: ETRN) entered into an agreement to exchange and eliminate EQM’s IDRs and restructure the economic general partner interest in EQM in exchange for 80 million newly issued EQM common units and 7 million newly issued EQM Class B units. Western Gas Equity Partners (NYSE: WGP) and Western Gas Partners (NYSE: WES) completed their corporate simplification, whereby WGP acquired WES and changed its name and ticker to Western Midstream Partners (NYSE: WES). And finally, TransMontaigne Partners (NYSE: TLP) was formally acquired by its sponsor, the private equity firm ArcLight Energy Partners.

Private Equity Buys into TRGP’s Badlands. Targa Resources (NYSE: TRGP) announced the sale of a 45% interest in its Badlands assets to funds managed by the private equity firm Blackstone for $1.6 billion. The Badlands assets are located in the Bakken and Three Forks Shale plays of the Williston Basin in North Dakota, and include approximately 480 miles of crude oil gathering pipelines, 125,000 barrels of operational crude oil storage, approximately 260 miles of natural gas gathering pipelines, and the Little Missouri natural gas processing plant with a current gross processing capacity of approximately 90 million cubic feet per day.

Chart of the Month

Since the start of the year, private equity funds have invested nearly $5 billion in energy infrastructure, or midstream. In fact, private equity has invested more than $20 billion since the beginning of 2018 in midstream assets in the public space at EBITDA multiples of 12x-15x according to RBC Capital Markets. Meanwhile, the current average EBITDA multiple for the midstream sector is 10.5x. The current median price-to-discretionary cash flow (P/DCF) multiple, another commonly used valuation metric for public MLP and midstream companies, is approximately 8.3x, historically low compared to the average since 2002 which was approximately 11.1x.

Private Equity Investment in Midstream Ramping Up