SteelPath October MLP update and news

MLP market overview

Midstream master limited partnerships (MLPs), as measured by
the Alerian MLP Index (AMZ), ended September up 0.7% on a price basis and once
distributions are considered. The AMZ results underperformed the S&P 500 Index’s
1.9% total return for the month. The best-performing midstream subsector for September
was the Propane group, while the Gathering and Processing subsector underperformed,
on average.

For the year through September, the AMZ is up 4.6% on a
price basis, resulting in a 10.9% total return. This compares to the S&P
500 Index’s 18.7% and 20.6% price gain and total return, 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 eight basis points (bps) over the
month, exiting the period at 698 bps. This compares to the trailing five-year
average spread of 535 bps and the average spread since 2000 of approximately 378
bps. The AMZ indicated distribution yield at month-end was 8.7%.

Midstream MLPs and affiliates raised no new marketed equity
(common or preferred, excluding at-the-market programs) but did issue $5.5
billion of marketed debt over the month. MLPs and affiliates announced $5.6
billion of new asset acquisitions in September.

Spot West Texas Intermediate (WTI) crude oil exited the
month at $54.07 per barrel, down 1.9% over the period and 26.2% lower
year-over-year. Spot natural gas prices ended September at $2.37 per million
British thermal units (MMbtu), up 1.3% over the month and 21.5% lower than September
2018. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $19.77
per barrel, 10.2% higher than the end of August and 53.3% lower than the
year-ago period.

News

Energy Transfer to acquire
SemGroup.
Energy Transfer (NYSE: ET) announced the acquisition of SemGroup
(NYSE: SEMG) for total consideration, including the assumption of debt of
approximately $5 billion. The acquisition is expected to significantly
strengthen ET’s crude oil transportation, terminalling, and export capabilities
with the addition of the Houston Fuel Oil Terminal (HFOTCO), a crude oil
terminal on the Houston Ship Channel with 18.2 million barrels of crude oil
storage capacity, five deep-water ship docks, and seven barge docks. HFOTCO is
supported by stable take-or-pay cash flows from diverse, primarily investment
grade customers. To enhance this optionality, ET also announced plans to
construct a new crude oil pipeline, the Ted Collins Pipeline, to connect HFOTCO
to Energy Transfer’s Nederland Terminal. This acquisition also expands ET’s
crude oil and NGL infrastructure by adding crude oil gathering assets in the DJ
Basin in Colorado and the Anadarko Basin in Oklahoma and Kansas, as well as
crude oil and natural gas liquids pipelines that connect the DJ Basin and
Anadarko Basin with crude oil terminals in Cushing, Oklahoma.

Enterprise moving forward
with PDH 2.
Enterprise Products Partners (NYSE: EPD) announced plans to
build its second propane dehydrogenation (PDH) plant, with capacity to consume
up to 35,000 barrels per day (BPD) of propane and produce up to 1.65 billion
pounds per year of polymer grade propylene (PGP). PDH 2 will be located at
Enterprise’s complex in the Mont Belvieu, Texas area. The facility is scheduled
to begin service in the first half of 2023. The project is supported by long-term
contracts with LyondellBasell Industries (NYSE: LYB), one of the largest
plastics, chemicals, and refining companies in the world.

Several LNG contracts
signed.
Multiple significant liquified natural gas (LNG) deals were
announced during September:

  • Tellurian (NYSE: TELL) and Petronet LNG Limited
    INDIA announced an agreement wherein Petronet intends to negotiate the purchase
    of up to 5 million tonnes per annum of LNG from Driftwood, concurrent with Petronet’s
    previously announced equity investment in the Driftwood facility.
  • Reuters reported that BP has signed a 15-year
    LNG supply deal with South Korea’s state-run natural gas company, Korea Gas
    Corporation (KOGAS). Under the deal, BP will supply 1.58 million tons of LNG
    per annum, beginning in 2025, from either the Freeport LNG terminal located in
    Texas or the proposed Venture Global LNG Calcasieu Pass terminal in Louisiana.
  • Cheniere Energy (NYSE: LNG) entered into
    long-term gas supply agreements with EOG Resources (NYSE: EOG) in which EOG agreed
    to sell natural gas to Cheniere over a period of approximately 15 years
    beginning in early 2020, with the quantity starting at 140,000 MMBtu per day
    and increasing to 440,000 MMBtu per day. The LNG associated with 140,000 MMBtu
    per day of this gas supply, or approximately 0.85 million tonnes per annum will
    be owned and marketed by Cheniere and EOG will receive a price based on the
    Platts Japan Korea Marker (JKM) for this gas. The remaining 300,000 MMBtu per
    day will be sold by EOG to Cheniere at a price indexed to Henry Hub.

Chart of the month

While energy infrastructure equity pricing remains
depressed, the broad equity markets are near all-time highs, as are other yield-oriented
equity sectors such as REITs and Utilities. Accordingly, valuations of general
equities, REITs, and Utilities are presently meaningfully higher than recent
and long-term average valuations, while midstream equities continue to look
cheap relative to history.

Figure 1: Midstream EV/EBITDA multiples compared with Energy stocks, REITs, Utilities, and the S&P 5001

MLP Valuation Table
Source: FactSet and Wells Fargo Securities, LLC. Current multiples are based on 2020 estimates. The 5-year and 10-year average reflect 2014-2018 and 2009-2018, respectively. All sector multiples reflect the median of individual constituents.

Click here for a PDF version of the blog

Footnotes:

1. EV is enterprise value, EBITDA is earnings before interest, taxes, depreciation and amortization

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.

Important Information

Blog header image: Martin Adams / Unsplash

The mention of specific companies does not
constitute a recommendation by 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 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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