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MLP Monthly Report: August 2018

Aug 27, 2018

View all Rohan Reddy's ArticlesRohan ReddyRohan Reddy

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) In its final ruling on July 18, 2018, the Federal Energy Regulatory Commission (FERC) eased its initial ruling from March, which had disallowed the recovery of an income tax allowance (ITA) in cost of service contracts for MLPs.  The final ruling allows for a recovery of an ITA for MLPs with a C-Corp parent, assuming the financials of the MLP are fully consolidated with the C-Corp parent.  The ruling also eliminates refunding of the accumulated deferred income tax (ADIT) for pipelines with cost of service contracts owned by MLPs.

2) Energy Transfer Equity, L.P. (ETE) announced a roll up of Energy Transfer Partners, L.P. (ETP).  ETP will merge with ETE. ETE will maintain its partnership tax status.  In addition to the 11% premium buyout of ETP, the simplification eliminates ETP’s incentive distribution rights (IDRs).  The transaction implies a 31% stealth distribution cut to ETP unitholders.  The transaction is expected to close by Q4 2018. Energy Transfer has said they are open to a future C-Corp conversion.

3) Williams (WMB) and private equity firm, KKR & Co (KKR), announced a joint venture (JV) to acquire Discovery’s midstream business from TPG, another private equity firm, for $1.2 billion.  Discovery is privately held.  Under the terms of the JV, WMB and KKR will have 40% and 60% ownership rights, respectively, and Discovery will be operated by WMB.

Sources: S&P Global, FERC, Natural Gas Intelligence (NGI), Energy Transfer Equity, L.P. and Williams.

Performance: Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, jumped by 6.2% as clarity by FERC on their March ruling was less inhibitive to MLPs than previously anticipated. The index has fallen -5.8% since last July. (Source: Bloomberg)

Yield: The current yield on MLPs stands at 7.67%. MLP yields remained higher than the broad market benchmarks for Emerging Market Bonds (6.33%), High Yield Bonds (6.31%), Fixed Rate Preferreds (5.59%), and Investment Grade Bonds (4.20%).1 MLP yield spreads versus 10-year Treasuries currently stand at 4.71%, higher than the long-term average of 4.36%.2 (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, rose 4.33% last month. Since July 2017, the EV-to-EBITDA ratio has risen by approximately 7.68%. (Source: Bloomberg).

Crude Production: The Baker Hughes Rig Count went up last month to 1048 rigs, rising by 1 rig compared to last month’s count of 1047 rigs. The rig count has more than doubled since its recent low point in May 2016 of 404 rigs. US production of crude oil held flat at 10.900 mb/d in the last week of July compared to 10.900 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

As of 07/31/2018, Energy Transfer Partners, L.P. (ETP) was a holding in the Global X MLP and Energy Infrastructure ETF (MLPX), with a 3.74% weighting and the Global X MLP ETF (MLPA) with a 9.80% weighting.  Williams (WMB) was a holding in the MLPX ETF, with a 7.26% weighting.

MLPA ETF and MLPX ETF do not have any holding in Energy Transfer Equity, L.P. (ETE), Discovery, KKR & Co (KKR) and TPG Capital L.P. (TPG).

 

 

Category: Reports

Topics: MLPs

This information is not intended to be individual or personalized investment or tax advice. Please consult a financial advisor or tax professional for more information regarding your tax situation.

Global X Management Company, LLC serves as an advisor to the Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO, 1 Freedom Valley Drive, Oaks, PA, 19456), which is not affiliated with Global X Management Company, LLC.

Investing involves risk, including possible loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in securities of MLPs involve risk that differ from investments in common stock including risks related to limited control and limited rights to vote on matters affecting the MLP. MLP common units and other equity securities can be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow). The Global X MLP Funds invest in the energy industry, which entails significant risk and volatility. The Funds invest in small and mid-capitalization companies, which pose greater risks than large companies. The Funds have a different and more complex tax structure than traditional ETFs and investors should consider carefully the significant tax implications of an investment in the Fund. The Funds are non-diversified. Current and future holdings are subject to risk.

The fund is taxed as a regular corporation for federal income tax purposes, which differs from most investment companies. Due to its investment in MLPs, the fund will be obligated to pay applicable federal and state corporate income taxes on its taxable income as opposed to most other investment companies. The fund expects that a portion of the distributions it receives from MLPs may be treated as tax-deferred return of capital. The amount of taxes currently paid by the fund will vary depending on the amount of income and gains derived from MLP interests and such taxes will reduce an investor’s return from an investment in the fund. The fund will accrue deferred income taxes for any future tax liability associated certain MLP interests. Upon the sale of an MLP security, the fund may be liable for previously deferred taxes which may increase expenses and lower the fund’s NAV. The potential tax benefits from investing in MLPs depend on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund’s value.

Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. In addition to the normal risks associated with investing, real estate and REIT investments are subject to changes in economic conditions, credit risk and interest rate fluctuations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. In addition, preferred stock may not pay a dividend, an issuer may suspend payment of dividends on preferred stock at any time, and in certain situations an issuer may call or redeem its preferred stock or convert it to common stock.

U.S. Treasury securities are considered to be of high credit quality and are backed by the full faith and credit of the U.S. government. U.S. Treasury securities, if held to maturity, guarantee a return of principal while no other securities mentioned in this material offer such a guarantee.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Market price returns are based upon the midpoint of the bid/ask spread at the close of the exchange and does not represent the returns an investor would receive if shares were trade at other times.  Brokerage commissions will reduce returns. Global X NAVs are calculated using prices as of 4:00 PM Eastern Time.

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Indices are unmanaged and do not include the effect of fees, expenses or sales charges. One cannot invest directly in an index.

Carefully consider the Funds’ investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the Funds’ summary and full prospectuses, which may be obtained by calling 1-888-GX-FUND-1 (1-888-493-8631), or by visiting www.globalxetfs.com. Read the prospectus carefully before investing.