For the year, the AMZ was down 19.0% on a price basis, resulting in a 12.4% total return loss. This compares to the S&P 500 Index’s 6.2% and 4.4% price and total return losses, respectively. The Natural Gas Pipeline group produced the best average total return for the year, while the Propane subsector was the weakest.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, widened by 95 basis points (bps) over the month, exiting the period at 630 bps. This compares to the trailing five-year average spread of 493 bps and the average spread since 2000 of approximately 370 bps. The AMZ indicated distribution yield at month-end was 9.0%.
Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) or debt during the month and announced no asset acquisitions during December.
Spot West Texas Intermediate (WTI) crude oil exited the month at $45.41 per barrel, down 10.8% over the period and 24.8% lower year-over-year. Spot natural gas prices ended December at $3.19 per million British thermal units (MMbtu), down 30.9% over the month and 9.9% lower than December 2017. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $24.07 per barrel, 4.5% lower than the end of November and 27.1% lower than the year-ago period.
ME2 Makes Long-Awaited Debut. Energy Transfer’s (NYSE: ET) Mariner East 2 NGL pipeline was placed into service in late December. The 350-mile pipeline transports ethane, propane and butane east from processing plants in Ohio across West Virginia and Pennsylvania to ET’s Marcus Hook Industrial Complex in Delaware County, PA, where the NGLs are stored for distribution to local, domestic and waterborne markets. Mariner East 2 is part of ET’s Mariner East system of pipelines designed to provide much-needed NGL takeaway capacity for the Marcellus and Utica Shale production areas in Eastern Ohio, West Virginia and Western Pennsylvania. The Mariner East 2X pipeline, which parallels Mariner East 2, is expected to be in service in late 2019.
New FERC Commissioner Sworn In. Bernard McNamee was sworn in as a new commissioner with the Federal Energy Regulatory Commission (FERC). Mr. McNamee, who fills the seat vacated by then-Commissioner Robert Powelson in August and reestablished a full five-seat FERC, previously served as executive director of the office of policy at the U.S. Department of Energy. Notably, in early January Commissioner McIntyre passed away, and Commissioner Cheryl LaFleur's term is set to end in June 2019, suggesting additional changes at the Commission should be expected in the coming months.
Corporate Consolidations and M&A. Enbridge (NYSE: ENB) completed its previously announced simplification transactions, acquiring Enbridge Energy Partners (NYSE: EEP), Enbridge Energy Management (NYSE: EEQ), Enbridge Income Fund (NYSE: ENF CN), and Spectra Energy Partners (NYSE: SEP).
Chart of the Month
The late-year market pullback pushed midstream valuations to levels not seen since the Great Recession of 2008 and 2009. At month-end the group’s median price-to-distributable cash flow (P/DCF) multiple was 7.3x, compared to the long-term average of 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.