May performance reflected improving sentiment as COVID-19 containment efforts ease in many locations. Furthermore, midstream investor anxieties may have been calmed by efforts to improve free cash flow generation and financial results that have exceed Wall Street’s expectations.
MLP Market Overview
Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended May up 6.9% on a price basis and up 9.0% once distributions were considered. The AMZ results outperformed the S&P 500 Index’s 4.8% total return for the month. The best performing midstream subsector for May was the Compression group, while the Natural Gas Pipeline subsector underperformed, on average.
For the year through May, the AMZ is down 33.8% on a price basis, resulting in a 30.3% total return loss. This compares to the S&P 500 Index’s 5.8% and 5.0% price and total return losses, respectively. The Propane group has produced the best average total return year-to-date, while the Gathering and Processing subsector has lagged.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, narrowed by 103 basis points (bps) over the month, exiting the period at 1,022 bps. This compares to the trailing five-year average spread of 620 bps and the average spread since 2000 of approximately 400 bps. The AMZ indicated distribution yield at month-end was 10.9%.
Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $5.2 billion of debt during the month. MLPs and affiliates announced $48 million of new asset acquisitions over the month.
Spot West Texas Intermediate (WTI) crude oil exited the month at $35.49 per barrel, up 88.4% over the period and 33.7% lower year-over-year. Spot natural gas prices ended May at $1.70 per million British thermal units (MMbtu), up 2.4% over the month and 33.1% lower than May 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $17.06 per barrel, 51% higher than the end of April and 13.4% lower than the year-ago period.
First quarter earnings season winds down. First quarter reporting season was mostly complete at the end of May. Through month-end, 55 midstream entities had announced distributions for the quarter; including six distribution increases, 19 reductions, and 30 unchanged from the previous quarter. Over the same time, 56 sector participants had reported first quarter financial results. Operating performance was, on average, better than expectations with EBITDA— Earnings Before Interest, Taxes, Depreciation and Amortization—coming in 2.2% higher than consensus estimates but 1.0% lower than the preceding quarter.
Williams inks a few deals and gets greener. Williams (WMB) announced an agreement with Chevron (CVX) and Total (TOT) to provide offshore natural gas transportation services to the Anchor development in the Gulf of Mexico. Late in the month press reports indicated WMB also agreed to supply natural gas to the Golden Pass LNG facility. Separately, WMB announced plans to develop solar energy installations at its facilities to provide electricity to the company’s existing natural gas transmission and processing operations.
Chart of the month: demand recovery underway
As portions of the United States slowly reopen, demand for refined petroleum products, such as gasoline, have bounced off the pandemic lows hit in mid-April. The Chart of the Month shows the four-week moving average of U.S. Product Supplied of Finished Motor Gasoline from the U.S. Energy Information Administration (EIA’s) Petroleum Status Weekly, and implied demand figure derived from changes in storage and considering refinery utilization and other factors. Demand remains impaired but is improving.
Figure 1: 4-Week Average U.S. Product Supplied of Finished Motor Gasoline (Thousand Barrels per Day)
All data sourced from Bloomberg L.P. as of 5/31/2020 unless otherwise stated
Blog Header Image: Bob Krist / Getty
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The opinions referenced above are those of the author as of June 11, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.
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The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
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. 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. 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.