April MLP performance
appeared to reflect improving sentiment as COVID-19 containment efforts are set
to ease in many locations. Furthermore, midstream investor anxieties may have
been calmed by efforts to improve free cash flow generation through capital
spending cuts and, for some, reductions to distribution payouts.
MLP Market Overview
Midstream MLPs, as measured by the Alerian MLP Index (AMZ),
ended April up 48.0% on a price basis and up 49.5% once distributions were considered.
The AMZ results outperformed the S&P 500 Index’s 12.8% total return for the
month. The best performing midstream subsector for April was the Gathering and
Processing group, while the Compression subsector underperformed, on average.
For the year through April, the AMZ is down 38.1% on a price
basis, resulting in a 36.0% total return loss. This trails the S&P 500
Index’s 9.9% and 9.3% price and total return losses, respectively. The Propane
group has produced the best average total returns year-to-date, while the Compression
subsector has lagged.
MLP yield spreads, as measured by the AMZ yield relative to
the 10-Year U.S. Treasury Bond, narrowed by 719 basis points (bps) over the
month, exiting the period at 1,157 bps. This compares to the trailing five-year
average spread of 609 bps and the average spread since 2000 of approximately 397
bps. The AMZ indicated distribution yield at month-end was 12.2%.
Midstream MLPs and affiliates raised no new marketed equity
(common or preferred, excluding at-the-market programs) and $1.7 billion of
debt during the month. MLPs and affiliates announced no new asset acquisitions
over the month.
Spot West Texas Intermediate (“WTI”) crude oil exited the
month at $18.84 per barrel, down 8.0% over the period and 70.5% lower
year-over-year. Spot natural gas prices ended April at $1.66 per million
British thermal units (MMbtu), down 2.9% over the month and 35.9% lower than April
2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $11.30
per barrel, 17.1% higher than the end of March and 54.7% lower than the
First quarter earnings
season underway. First quarter reporting season began in April. Through
month-end, 48 midstream entities had announced distributions for the quarter,
including six distribution increases, 15 reductions, and 27 distributions that
were unchanged from the previous quarter. Over the same time, six sector
participants had reported first quarter financial results. Operating
performance has been, on average, in-line with EBITDA expectations – Earnings
Before Interest, Taxes, Depreciation and Amortization – coming in 0.3% higher
than consensus estimates but 2.1% lower than the preceding quarter.
Chart of the month
Despite the unprecedented combination of a significant and
abrupt crude oil demand destruction, due to a rapid expansion of COVID-19
containment efforts globally, and the threat of surging crude oil supply, due
to the unanticipated emergence of a Saudi-Russian crude oil market share battle, total
midstream EBITDA estimates, according to analysts at Wells Fargo, for 2020 and
2021 have declined by only 7% and 11%, respectively, since the beginning of
2020. Perhaps more importantly, estimated industry free cash flow, defined as
distributable cash flow less growth capital expenditures and acquisitions, has
increased by 15% and 9%, respectively, as the industry’s capital spending over
2020 and 2021 is now expected to be $15 billion less than Wells Fargo’s
expectations coming into the year.
Figure 1: Midstream estimate changes since year-end 2019
All data sourced from Bloomberg L.P.
as of April 30, 2020 unless otherwise stated
Header Image: Maryviolet/ iStock
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
The opinions referenced above
are those of the author as of May 7, 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
The mention of specific
companies, industries, sectors, or issuers does not constitute a recommendation
by Invesco Distributors, Inc.
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.
An Investment cannot be made into an index. 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.
opinions expressed are those of Invesco SteelPath MLP, are based on current
market conditions and are subject to change without notice. These opinions may
differ from those of other Invesco investment professionals.