MLP Monthly Report: August 2017

The August MLP Monthly Report can be found here offering insights on MLP industry news, the asset class’s performance, yields, valuations, and fundamental drivers.

Summary

News:

1) As part of the OPEC meeting on July 25th, the cartel announced two major pieces of news. Nigeria, previously exempt from the production cuts agreement, will now take part in the agreement and limit production to not exceed 1.8 million barrels a day (mb/d). Current output stands at 1.6 mb/d. The second announcement was that Saudi Arabia will cut crude exports to 6.6 mb/d, lower than the 7.2 mb/d average from January to May this year.

2) British Petroleum (BP) announced the firm is considering an Initial Public Offering (IPO) of its U.S. pipeline assets in the Midwest and Gulf Coast. The regulatory process for forming this MLP entity, if considered, would be initiated in the 2nd half of 2017. The firm indicated that it would own the general partner of the MLP, all the Incentive Distribution Rights (IDRs), and most of the MLP’s limited partner interests. (Source: Reuters and British Petroleum.)

3) Kinder Morgan Inc. (KMI) announced a $2 billion share repurchase program and a 60% increase in its annual dividend next year. After 2018, the firm gave guidance that it expects to raise the dividend by 25% in both 2019 and 2020.

Sources: Wall Street Journal, Reuters, BP, Kinder Morgan Inc

Performance: Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, rose 0.63% last month largely due to higher oil prices. The index has fallen 0.46% over the last one-year period. (Source: Bloomberg)

Yield: The current yield on MLPs stands at 7.12%. MLP yields remained higher than the broad market benchmarks for High Yield Bonds (5.41%), Preferreds (5.40%), Emerging Market Bonds (5.37%), and REITs (4.02%).¹ MLP yield spreads versus 10-year Treasuries currently stand at 4.82%, higher than the long-term average of 3.69%. (Sources: Bloomberg, AltaVista Research, and Fed Reserve)

Valuations: The Enterprise Value to EBITDA ratio (EV-to-EBITDA), which seeks to provide more color on the valuations of MLPs, increased marginally in July compared to June as higher oil prices helped MLP unit prices. Since July 2016, the EV-to-EBITDA ratio has increased by approximately 14.60%. (Source: Bloomberg, MLPData, company financials).

Crude Production: The Baker Hughes Rig Count rose by 18 rigs to 958 compared to last month’s count of 940. The rig count has more than doubled since its recent low point in May 2016 of 404 rigs. US production of crude oil rose to 9.430 mb/d in the last week of July from 9.338 mb/d at the end of June. (Source: Baker Hughes & EIA)

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the most recent month- and quarter-end, please click here.

Footnotes

As of 07/31/2017, Kinder Morgan Inc was a holding in the Global X MLP and Energy Infrastructure ETF (MLPX), with a 9.15% weighting, Global X S&P 500 Catholic Values ETF (CATH), with a 0.19% and the Global X Scientific Beta US ETF (SCIU), with a 0.22% weighting. Global X does not have any funds holding British Petroleum (BP).

1. Asset class representations are as follows, MLPs, Solactive MLP Infrastructure Index; High Yield Bonds, Bloomberg Barclays US Corporate High Yield Index; Preferreds, BofA Merrill Lynch Fixed Rate Preferred Securities Index; Emerging Market Bonds, J.P. Morgan EMBI Global Core Index; REITs, FTSE NAREIT All Equity REITS Index; Investment Grade Bonds, iBoxx USD Liquid Investment Grade Index; Equities, S&P 500 Index; Energy, S&P 500 Energy Index; US Bonds, CBOE 10 Year Treasury Note Yield Index; Crude Oil, Generic 1st ‘CL’ Future, and Utilities, Utilities Select Sector Index.

Solactive MLP Infrastructure Index: The Solactive MLP Infrastructure Index is intended to give investors a means of tracking the performance of the energy infrastructure MLP asset class in the United States. The index is composed of Midstream MLPs engaged in the transportation, storage, and processing of natural resources.

Bloomberg Barclays US Corporate High Yield Index: The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.

BofA Merrill Lynch Fixed Rate Preferred Securities Index: BofA Merrill Lynch Fixed Rate Preferred Securities Index tracks the performance of fixed-rate U.S. dollar-denominated preferred securities issued in the U.S. domestic market.

J.P. Morgan EMBI Global Core Index: J.P. Morgan EMBI Global Core Index is a broad, diverse U.S. dollar-denominated emerging markets debt benchmark that tracks the total return of actively traded external debt instruments in emerging market countries.

FTSE NAREIT All Equity REITS Index: FTSE NAREIT All Equity REITS Index is a free float adjusted market capitalization weighted index that includes all tax qualified equity REITs listed in the NYSE, AMEX, and NASDAQ National Market.

iBoxx USD Liquid Investment Grade Index: The iBoxx USD Liquid Investment Grade index measures the performance of 600 highly liquid investment grade corporate bonds. S&P 500 Index: S&P 500 Index tracks the performance of 500 leading U.S. stocks and captures approximately 80% coverage of available U.S. market capitalization. It is widely regarded as the best single gauge of large-cap U.S. equities.

S&P 500 Index: The S&P 500® Index is an index of 500 stocks chosen by factors such as market size, liquidity, and industry grouping. The Index is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe.

S&P 500 Energy Index: The S&P 500® Energy Index comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.

Chicago Board Options Exchange 10-Year Treasury Note Yield Index: Chicago Board Options Exchange 10-Year Treasury Note Yield Index measures 10-year treasury note yields and changes over time to the note’s yield.

Utilities Select Sector Index: The Utilities Select Sector Index seeks to provide an effective representation of the utilities sector of the S&P 500 Index. The Index includes companies from the following industries: electric utilities; water utilities; multi-utilities; independent power producers and energy traders; and gas utilities.

Crude Oil: Measured based on the Generic 1st ‘CL’ Future, which is the nearest crude oil future to expiration.

EBITDA: Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments.

Average Spread: Average spread is the average of the excess of the MLPs yield over the 10 year treasuries yield.

Enterprise Value (EV): EV is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization.

MLP Monthly Report: August 2017

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