Midstream equities outperformed the broader markets in November as third-quarter earnings season demonstrated better-than-expected sector results and as demand sentiment was bolstered by encouraging vaccine results. LNG exports have recovered are now setting new record levels not seen since 2018.
MLP market overview
Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended November up 21.7% on a price basis and up 23.8% once distributions are considered. The AMZ outperformed the S&P 500 Index’s 10.9% total return for the month. The best performing midstream subsector for November was the Gathering and Processing group, while the Propane subsector underperformed, on average.
For the year through November, the AMZ is down 38.0% on a price basis, resulting in a 30.6% total return loss. This compares to the S&P 500 Index’s 12.1% and 14.0% price and total returns, respectively. The Propane group has produced the best average total return year-to-date, while the Diversified subsector has lagged.
MLP yield spreads, as measured by the AMZ yield relative to the 10-year US Treasury bond, narrowed by 278 basis points (bps) over the month, exiting the period at 1,058 bps. This compares to the trailing five-year average spread of 687 bps and the average spread since 2000 of approximately 418 bps. The AMZ indicated distribution yield at month-end was 11.4%.
Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $1.4 billion of debt during the month. No new asset acquisitions were announced in November.
West Texas Intermediate (WTI) crude oil exited the month at $45.34 per barrel, up 26.7% over the period and 17.8% lower year-over-year. Natural gas prices ended November at $2.88 per million British thermal units (MMbtu), down 14.1% over the month but 26.3% higher than November 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $21.60 per barrel, 8.5% higher than the end of October and 9.4% lower than the year-ago period.
Third-quarter earnings season winds down. Third-quarter reporting season wrapped up during November. Through month-end, 52 midstream entities had announced distributions for the quarter, including four distribution increases, four reductions, and 44 distributions that were unchanged from the previous quarter. Through the end of November, 56 sector participants had reported third-quarter financial results. Operating performance has been, on average, better than expectations with EBITDA (or earnings before interest, taxes, depreciation and amortization) coming in 6.1% higher than consensus estimates and 9.4% higher than the preceding quarter.
More meaningful equity buybacks2 announced. Several substantial unit/share buyback programs were announced in November. MPLX, LP (NYSE: MPLX) announced the largest overall program at $1 billion, while Plains All American Pipeline (NYSE: PAA) announced a $500 million program, Western Midstream (NYSE: WES) announced a $250 million buyback, and EnLink Midstream (NYSE: ENLC) and Rattler Midstream (NYSE: RTLR) each announced $100 million buyback authorizations.
New addition to the public midstream universe expected in 2021. DTE Energy (NYSE: DTE) recently announced its intention to spin-off its midstream segment into its own public entity next year. The segment includes natural gas pipeline, storage, and gathering businesses located predominately in the northeastern US that are expected to generate approximately $700 million of EBITDA during 2020.
Chart of the month: US LNG hits new record
Feedgas for facilities that cool natural gas to liquid form hit a new high of over 11 billion cubic feet per day entering December, staging a meaningful recovery from virus-related lows in August. Volumes are expected to remain robust through the winter but are likely to be influenced by regional weather patterns.3
Liquefied natural gas (LNG) requires considerably less storage volume and thus allows natural gas to be transported via ship to regions with inadequate reserves or limited access to long-distance transmission pipelines to meet their natural gas demand. Midstream sector participants in the United States facilitate LNG exports via all meaningful logistical efforts along the supply chain including gathering, transportation, storage, liquefaction, loading, and shipping.
Blog header image: Raymond Forbes LLC / Stocksy
Source: All data sourced from Bloomberg as of 11/30/2020 unless otherwise stated.
- Defined as distributable cash flow less growth capital expenditures and acquisitions, where distributable cash flow represents cash flow generated by the company’s operations reduced by expenditures to maintain the assets.
- Share repurchase is the re-acquisition by a company of its own shares.
- S&P Global Platts, Gas Daily Market Fundamentals Data, Dec. 1, 2020
The opinions referenced above are those of the author as of Dec. 1, 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.
Midstream companies are engaged in the transportation, storage, processing, refining, marketing, exploration, and production of natural gas, natural gas liquids, crude oil, refined products or other hydrocarbons.
The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc. A list of the top 10 holdings of each fund can be found by visiting invesco.com.
As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 11.86%, 12.50%, 6.91% and 11.24%, respectively in MPLX LP.
As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 4.71%, 0.00%, 0.26% and 4.44%, respectively in Plains All American Pipeline LP.
As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 1.82%, 7.60%, 3.35% and 1.79%, respectively in Western Midstream Partners LP.
As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 0.00%, 4.83%, 0.00% and 0.00%, respectively in EnLink Midstream LP.
As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 0.00%, 0.00%, 0.00% and 0.00% respectively in Rattler Midstream LP and DTE Energy.
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. An investment cannot be made into an index. Past performance does not guarantee future results
A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level, calculated by deducting the yield of one instrument from the other.
A basis point is one hundredth of a percentage point.
Most MLPs operate in the energy sector and are subject to the risks generally applicable to companies in that sector, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. MLPs are also subject the risk that regulatory or legislative changes could eliminate the tax benefits enjoyed by MLPs which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the portfolio’s investments. Although the characteristics of MLPs closely resemble a traditional limited partnership, a major difference is that MLPs may trade on a public exchange or in the over-the-counter market. Although this provides a certain amount of liquidity, MLP interests may be less liquid and subject to more abrupt or erratic price movements than conventional publicly traded securities. The risks of investing in an MLP are similar to those of investing in a partnership and include more flexible governance structures, which could result in less protection for investors than investments in a corporation. MLPs are generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns.
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.
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.
Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.