In January, the master limited partnership (MLP) sector saw two more companies eliminate incentive distribution rights (IDRs) and the beginning of Q4 earnings season. In our Chart of the Month, we look back at oil demand during the SARS outbreak in 2003 to see how it compares to today’s novel coronavirus.
MLP market overview
Midstream MLPs, as measured by the Alerian MLP Index (AMZ),
ended January down 6.6% on a price basis and down 5.6% once distributions were considered.
The AMZ underperformed the S&P 500 Index’s 0.0% total return for the month.
The best performing midstream subsector for January was the propane group,
while the marine subsector underperformed, on average.
MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, widened by 126 basis points (bps) over the month, exiting the period at 852 bps. This is below the trailing five-year average spread of 561 bps and the average spread since 2000 of approximately 385 bps. The AMZ indicated distribution yield at month-end was 10.0%.
Midstream MLPs and affiliates raised $1.6 billion of new
marketed equity (common or preferred, excluding at-the-market programs) and $13.0
billion of marketed debt during the month. MLPs and affiliates announced $0.1 billion
of asset acquisitions over the month.
Spot West Texas Intermediate (WTI) crude oil exited the
month at $51.56 per barrel, down 15.6% over the period and 4.1% lower
year-over-year. Spot natural gas prices ended January at $1.91 per million
British thermal units (MMbtu), down 8.6% over the month and 33.0% lower than January
2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $20.31
per barrel, 2.1% lower than the end of December and 24.7% lower than the
Two more MLPs eliminate
IDRs. CNX Midstream (NYSE: CNXM) announced an agreement with its sponsor,
CNX Resources (NYSE: CNX), to eliminate CNXM’s incentive distribution rights (IDRs)
in exchange for common units, Class B units, and deferred cash payments that
will be paid in three installments. This allows the transaction to be
immediately accretive to distributable cash flow (DCF) per unit in the first
year and gain further accretion in year two. Additionally, CrossAmerica
Partners (NYSE: CAPL) announced an agreement to eliminate all IDRs and to
acquire retail and wholesale assets from entities affiliated with Joe Topper— CAPL’s
chairman, who recently reacquired a controlling stake in the partnership after
selling his interests in CAPL’s predecessor company in 2014.
Western and OXY take
steps toward parting ways. Western Midstream Partners (NYSE: WES) and its
sponsor, Occidental Petroleum (NYSE: OXY), announced the execution of agreements
that will enable WES to fully operate as a stand-alone business, a move consistent
with WES’s and Occidental’s joint effort to establish WES as an independent
midstream company. These new agreements support WES’s ongoing and focused
pursuit of third-party growth opportunities and underscore the importance of
WES’s commitment to leverage its existing midstream infrastructure to attract
additional Occidental and third-party volumes. The executed agreements include
amendments to the limited partnership agreement that significantly expand
unitholders’ rights, including the right to remove and replace Occidental as
the general partner. OXY also stated its intent to continue its operational
relationship with WES and expects to maintain a significant economic interest
in WES, which Occidental will reduce to below 50% during 2020.
season kicks off. Fourth-quarter reporting season began in January. Through
month-end, 51 midstream entities had announced distributions for the quarter,
including 20 distribution increases, four reductions, and 27 distributions that
were unchanged from the previous quarter. Through the end of January, eight
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 5.1% higher
than consensus estimates and 6.9% higher than the preceding quarter.
Chart of the month
Oil prices have been roiled by the outbreak of the Wuhan
coronavirus, falling by about 15% in the past two weeks and closing below $50
per barrel for the first time in over a year. In attempting to quantify the
impact of the coronavirus, many have pointed to the similarities between this
epidemic and the spread of SARS (Severe Acute Respiratory Syndrome) back in
Truth be told, there’s even less of a “playbook” within the
oil markets when analyzing the link between SARS and the Wuhan coronavirus.
Even estimates on the magnitude of demand destruction stemming from SARS in the
early 2000s vary by some degree, from as low as 100 thousand barrels of oil per
day (0.1% of global oil demand) up to 250 thousand barrels of oil per day
(0.3%). However, as indicated in the chart below, this negative impact created
a momentary dent in the overall global oil demand growth trend. We would
further underscore that OPEC’s management of the oil markets back then wasn’t
as cohesive and clear-cut as today.
Figure 1: Global Oil Demand During SARS Outbreak
For a more in-depth discussion on the potential impacts of
the virus, Invesco’s Chief Global Market Strategist penned some observations on
1/29 titled “Assessing
the market impact of the Wuhan coronavirus”. Amidst the ongoing uncertainty
on timing and scope of this virus, we would highlight her final sentence, “we
would expect a fairly swift rebound as the contagion improves, particularly
given the accommodative central bank environment supporting risk assets.”
Source: All data from Bloomberg L.P., as of
1/31/2020 unless otherwise specified.
Credit: Wizemark/ Stocksy
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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.
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.
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SteelPath, are based on current market conditions and are subject to change
without notice. These opinions may differ from those of other Invesco