Midstream equities performed admirably in December but underperformed the broader markets to close a volatile year highlighted by the impact of the COVID-19 global pandemic and a brief OPEC market share battle. Amidst the energy market volatility, natural gas liquids prices have recovered to two-year highs, which may bode well for throughput volumes for midstream sector participants focused on natural gas processing, fractionation, storage, and export.
MLP market overview
Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended December up 2.5% on a price basis and after distributions are considered. The AMZ underperformed the S&P 500 Index’s 3.8% total return for the month. For the quarter, the AMZ rallied 32.3% compared to a 12.1% gain for the S&P 500 Index. The best performing midstream subsector for December was the Compression1 group, while the Propane subsector underperformed, on average.
For the year, the AMZ was down 36.4% on a price basis, resulting in a 28.8% total return loss. This compares to the S&P 500 Index’s 16.3% and 18.4% price and total returns, respectively, over the same period. The Other2 group produced the best average total return for 2020, driven by fuel distribution companies, while the Diversified subsector lagged.
MLP yield spreads, as measured by the AMZ yield relative to the 10-year US Treasury bond, narrowed by 25 basis points (bps) over the month, exiting the period at 1,022 bps. This compares to the trailing five-year average spread of 692 bps and the average spread since 2000 of approximately 421 bps. The AMZ indicated distribution yield at month-end was 11.1%.
Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $2.9 billion of debt during the month. No new asset acquisitions were announced in December.
West Texas Intermediate (WTI) crude oil exited the month at $48.52 per barrel, up 7.0% over the period and 20.5% lower year-over-year. Natural gas prices ended December at $2.39 per million British thermal units (MMbtu), down 16.4% over the month but 14.4% higher than December 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $24.70 per barrel, 14.4% higher than the end of November and 19.0% higher than the year-ago period.
FERC sets oil pipeline index rate. The Federal Energy Regulatory Commission (FERC) established a new index level to calculate annual changes for interstate oil pipeline rate ceilings for 2021 through 2026. FERC set the new index level of Producer Price Index for Finished Goods plus 0.78% for the five-year period from July 1, 2021, to June 30, 2026. Generally, pipelines that carry natural gas, crude oil, and refined products across state boundaries are subject to FERC regulation on the rates charged for their services, as well as other terms and conditions. Further, many non-FERC-regulated midstream assets employ terms and conditions that mimic the FERC policies, including annual price adjustments linked to the index rate.
TRP to acquire TCP. TC Pipelines, LP (NYSE: TCP) and TC Energy Corp (NYSE: TRP) announced a definitive agreement under which TRP will acquire TCP in exchange for TRP common shares. TCP common unitholders would receive 0.70 common shares of TRP for each issued and outstanding publicly held TCP common unit. The transaction is expected to close late in the first quarter or early in the second quarter of 2021 subject to the approval by the holders of a majority of outstanding common units of TCP and customary regulatory approvals.
EPD loads first LPG-powered VLGC. Enterprise Products Partners LP (NYSE: EPD) announced that the first vessel powered by liquefied petroleum gas (LPG) has been loaded at the Enterprise Hydrocarbon Terminal on the Houston Ship Channel. The Very Large Gas Carrier (VLGC) BW Gemini, which had been retrofitted for dual fuel capabilities, was loaded with a record 590,000 barrels of LPG, including cargo and fuel. By providing the option for vessels to refuel with LPG, Enterprise is also helping shipping companies reduce their emissions in accordance with the new International Maritime Organization standards (IMO 2020).
Chart of the month: NGL price recovery gains steam
Pricing for natural gas liquids (NGLs) have more than recovered from the extreme lows seen in March 2020 to levels not experienced since early 2019, driven by robust Asian demand. NGLs (ethane, propane, butane, isobutane, and natural gasoline) are often produced alongside oil and natural gas and are used as heating fuels and in the petrochemical and oil refining industries. Energy midstream companies transport, process, fractionate, and store NGLs, and increased NGL pricing has historically been beneficial to production companies — thus we believe higher pricing is often supportive of either increased throughput volumes and/or more healthy producer balance sheets.
Source: Bloomberg as of 12/31/2020.
Blog photo credit: Hugh Sitton / Getty
Source: All data sourced from Bloomberg as of 12/31/2020 unless otherwise stated.
1 Compression companies are focused on reducing the volume and increasing the pressure of a gaseous fluid necessary for transportation and storage.
2 Companies in the Other category do not fall under any other MLP investment subsector and may include chemical or marine companies.
The opinions referenced above are those of the author as of Jan. 4, 2021. 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 12/31/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 13.04%, 0.00%, 4.61% and 12.93%, respectively in Enterprise Products Partners LP.
As of 12/31/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 9.37%, 0.00%, 4.96% and 9.24%, respectively in TC Pipelines LP.
As of 12/31/2020 none of the SteelPath funds were invested in TC Energy Corporation.
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.