SteelPath November MLP update and news

The master
limited partnership (MLP) sector saw a series of events take place in October, including
the start of third- quarter earnings season and yet another MLP simplification
eliminating incentive distribution rights. And though the weight of energy
stocks in the S&P 500 Index recently hit an all-time low, we’ve seen this
story before, and it may bode well for the MLP sector.

Overview

Midstream master limited partnerships (MLPs), as measured by
the Alerian MLP Index (AMZ), ended October down 7.4% on a price basis and down
6.3% once distributions are considered. The AMZ results trailed the S&P 500
Index’s 2.2% total return for the month. The best performing midstream
subsector for October was the Marine group, while the Propane subsector underperformed,
on average.

For the year through October, the AMZ is down 3.1% on a
price basis, resulting in a 3.9% total return. This trails the S&P 500
Index’s 21.2% and 23.2% price and total returns, respectively. The Compression 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, widened by 65 basis points (bps) over the
month, exiting the period at 764 bps. This exceeds the trailing five-year
average spread of 542 bps and the average spread since 2000 of approximately 380
bps. The AMZ distribution yield at month-end was 9.3%.

Midstream MLPs and affiliates raised no new marketed equity
(common or preferred, excluding at-the-market programs) or debt over the month.
MLPs and affiliates announced $6.2 billion in new asset acquisitions during October,
including a major acquisition tied to an MLP simplification.

Spot West Texas Intermediate (WTI) crude oil exited the
month at $54.18 per barrel, a 0.2% increase over the period and a 17.0% decline
year-over-year. Spot natural gas prices ended October at $2.73 per million
British thermal units (MMbtu), up 15.2% over the month but 17.5% lower than October
2018. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $22.01
per barrel, 11.3% higher than the end of September and 28.7% lower than the
year-ago period.

News

Third-quarter earnings season begins. Third-quarter reporting season kicked-off in October. Through month-end, 51 midstream entities had announced distributions for the quarter, including 19 distribution increases and 32 unchanged distributions from the previous quarter. Through the end of October, 22 sector participants had reported third quarter financial results. Operating performance has been, on average, modestly below expectations, with EBITDA— Earnings Before Interest, Taxes, Depreciation and Amortization—coming in 1.0% lower than consensus estimates but 3.0% higher than the preceding quarter.

Another MLP simplification
moves forward.
Hess Midstream (NYSE: HESM) announced an agreement to
acquire Hess Infrastructure Partners LP (HIP), including HIP’s outstanding
economic general partner interest and incentive distribution rights (IDRs) in
HESM. In addition, HESM will be converted into an “Up-C” structure in which IDR
payments to sponsors are eliminated. Once the HESM transaction is completed,
only 17 midstream entities with IDRs will remain:

       Blueknight Energy (NYSE:
BKEP)
Enable Midstream
(NYSE: ENBL) 
 
BP Midstream
(NYSE: BPMP) 
Global Partners
(NYSE: GLP) 
 
CNX Midstream
(NYSE: CNXM) 
Martin Midstream
(NYSE: MMLP) 
 
CrossAmerica
Partners (NYSE: CAPL) 
Noble Midstream
(NYSE: NBLX) 
 
CSI Compressco
(NYSE: CCLP) 
Oasis Midstream
(NYSE: OMP) 
 
DCP Midstream
(NYSE: DCP) 
Shell Midstream
(NYSE: SHLX) 
 
Delek Logistics
Partners (NYSE: DKL) 
Summit Midstream
(NYSE: SMLP) 
 
Sunoco (NYSE:
SUN) 
 
TC Pipeline
(NYSE: TCP) 
 
USD Partners
(NYSE: USDP)
 
 

Private equity
continues to show interest in energy infrastructure.
Brookfield Super-Core
Infrastructure Partners acquired a 25% equity stake in Cove Point LNG from
Dominion (NYSE: D) for $2 billion. Cove Point owns a liquefied natural gas
(LNG) import, export, and storage facility on the Maryland coast, including a
136-mile pipeline that interconnects the facility with the interstate pipeline
system. These assets provide liquefaction, gasification, transportation,
storage, and peaking gas supply services to customers in the United States, India,
and Japan. 

Chart of the month

Energy equities remain out of favor. The energy weighting
within the S&P 500 Index has hit an all-time low of 4.3% versus the
twenty-year average of 8.6%. We believe investor apathy has also impacted
midstream fund flows and, as a result, price realization for sector
participants. MLPs now trade at an EV/EBITDA multiple of 9.6x and yield 9.3%
versus the 10-year average of 12.5x and 7.0%, respectively. Midstream trading
weakness has persisted despite continued healthy operating performance and an
average distribution coverage ratio that is at an all-time high. However, this
is not the first-time midstream equities have suffered from investor
apathy.   

Between the fall of 1998 and the summer of 2000, the broader
equity market, as measured by the S&P 500 Index, rose 60% while the Nasdaq
soared 180%. Tech stocks were providing such great returns that other sectors
struggled to gain interest. Over this period, MLPs, as measured by the Alerian
MLP Index, only gained 3%, drastically underperforming, even though crude oil
prices had rallied 150% over the same period. However, it should be pointed
out, after distribution payments, MLP total return over this period neared 20%.
This relative underperformance reversed in 2000 when tech and the broader
market began to falter. Between the late summer of 2000 and the fall of 2002,
the S&P 500 Index declined 50% and the Nasdaq lost 75%, while the Alerian
MLP Index appreciated by 25% and provided a 45% total return, once factoring in
distributions.

Figure 1: Tech bubble
performance, December 1997 to December 2002

Source: Bloomberg L.P., as of 12/02. Past performance does not guarantee future results.

Click here to download a PDF of this blog. 

Important Information

Blog
Header Image: Busà Photography / Getty Images

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.

The mention of specific companies, industries,
sectors, or issuers does not constitute a recommendation by Invesco
Distributors, Inc.

The mention of specific securities does not
constitute a recommendation to buy/sell on behalf of the Fund or Invesco
Distributors, Inc.

Certain Invesco funds may hold the securities of the
companies mentioned. A list of the top 10 holdings of each fund can be found by
visiting invesco.com.

The NASDAQ is an electronic exchange where
stocks are traded through an automated network of computers.

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. The S&P 500 Index is a broad-based measure of domestic
stock market performance. 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. 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.

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