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.
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.
The views presented herein represent the opinions of OFI Global Asset Management (“OFI Global”) and are not intended as recommendations, as investment advice or to predict or depict the performance of any investment. These views are based on the information available as of the date noted and are subject to change at any time based on subsequent developments.
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. The Dow Jones Equity All REIT Index is designed to measure all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. The Dow Jones Utility Average, also known as the Dow Jones Utilities Index, aims to represent the stock performance of 15 large, well-known U.S. companies within the utilities industry. 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. Additionally, investing in MLPs involves material income tax risks and certain other risks. Actual results, performance or events may be affected by, without limitation (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) changes in laws and regulations, and (5) changes in the policies of governments and/or regulatory authorities. Investing in MLPs may generate unrelated business taxable income (UBTI) for tax-exempt investors both during the holding period and at time of sale. Diversification does not guarantee profit or protect against loss.