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MLP Monthly Report: February 2023

Feb 23, 2023

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

The latest quarterly MLP Insights piece providing analysis into the midstream space can be found here as well.

Summary

News

1) Chinese oil consumption is expected to touch a new high this year as it eases its Zero Covid policy, boosting global demand and prices. Daily demand is expected to increase by 800,000 barrels per day in 2023, bringing consumption to an all-time high of around 16 million barrels per day, according to the median estimate of eleven China-focused consultants surveyed by Bloomberg News. China’s more robust forecasted demand in the second quarter is expected to offset the usual seasonal weakness in crude.

2) The EU agreed to impose a $100-per-barrel cap on premium products, such as diesel, and a $45-per-barrel limit on low-end products, such as fuel oil, exported by Russia. Shipping firms transporting Russian oil products can access western insurance and financing if they pay less than the prescribed level. The implicit discount for diesel under the price cap is rather minor, which is in part due to worries about oil market tightness.

3) OPEC+ bolstered the oil producer group’s current output policy, keeping production cuts to 2 million barrels per day (bpd), as agreed in November last year, to prop up the market in the face of escalating Chinese demand and uncertainties in Russian supply prospects. Expectations of a recovery in Chinese demand collide with fears of a global recession. Investors are hoping the US Federal Reserve will signal an end to its rate-hike cycle, which the oil market will closely monitor.

Sources: Bloomberg News. (2023, January 13). Chinese oil demand seen hitting record on covid zero pivot. Bloomberg.; Foy, H., Hancock, A., Sheppard, D., & Brower, D. (2023, February 4). EU agrees price caps on Russian oil products. Financial Times.; Astakhova, O., Edwards, R., & Dahan, M, E. (2023, February 1). OPEC+ sticks to oil output policy after brief meeting. Reuters.

Performance: Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, increased by 6.43% last month. The index increased by 24.06% since last January. (Source: Bloomberg)

Yield: The current yield on MLPs stands at 7.24%. MLP yields remained higher than Emerging Market Bonds (7.03%), Fixed Rate Preferreds (6.47%), and the broad market benchmark for Investment Grade Bonds (4.96%) and lower than High Yield Bonds (8.20%).1 MLP yield spreads versus 10-year Treasuries currently stand at 3.72%, lower than the long-term average of 5.63%.2 (Sources: Bloomberg; Board of Governors of the Federal Reserve System. (2023, January 31). Preformatted package: Treasury constant maturities [Data set]. Data Download Program.)

Valuations: The Enterprise Value to EBITDA ratio (EV-to-EBITDA), which seeks to provide more color on the valuations of MLPs, decreased by 18.91% from last month. Since January 2022, the EV-to-EBITDA ratio is down by approximately 20.11%. (Source: Bloomberg)

Crude Production: The Baker Hughes Rig Count decreased to 771 rigs, decreasing by 8 rigs from last month’s count of 779 rigs. US production of crude oil stood at 12,200 mb/d in the last week of January increased from December levels of 12,100 mb/d. (Sources: Baker Hughes. (2023, February 9). North America rig count.; U.S. Energy Information Administration. (2023, February 9). Petroleum and other liquids.)

For performance data current to the most recent month- and quarter-end, please click here.

DEFINITIONS

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.

S&P MLP Index: S&P MLP Index provides investors with exposure to the leading partnerships that trade on the NYSE and NASDAQ.  The index includes both master limited partnerships (MLPs) and publicly traded limited liability companies (LLCs), which have a similar legal structure to MLPs and share the same tax benefits

Bloomberg US Corporate High Yield Total Return Index: The Bloomberg 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 Bloomberg EM country definition, are excluded.

ICE BofA Fixed Rate Preferred Securities Index: The ICE BofA Fixed Rate Preferred Securities Index tracks the performance of fixed rate US dollar denominated preferred securities issued in the US domestic market.

Bloomberg EM USD Aggregate Total Return Index: The Bloomberg Emerging Markets Hard Currency Aggregate Index is a flagship hard currency Emerging Markets debt benchmark that includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.

Bloomberg US Corporate Total Return Index: The Bloomberg US Corporate Total Return Value Unhedged Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

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.

Category: Reports

Topics: Income, Income Strategies

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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 Fund invests in the energy industry, which entails significant risk and volatility. MLPA is non-diversified. The Fund invests in small and mid-capitalization companies, which pose greater risks than large companies. MLPA has 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. Current and future holdings are subject to risk.

MLPA 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. 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. 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. 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.

Carefully consider the fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the fund’s full or summary prospectus, which may be obtained by calling (1.888.493.8631), or by visiting globalxetfs.com. Read the prospectus carefully before investing.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Beginning October 15, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to October 15, 2020, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time. The returns shown do not represent the returns you would receive if you traded shares at other times. Indices are unmanaged and do not include the effect of fees, expenses or sales charges. One cannot invest directly in an index. Index data source: Solactive AG.

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), which is not affiliated with Global X Management Company LLC or Mirae Asset Global Investments. Solactive Indexes have been licensed by Solactive AG for use by Global X Management Company, LLC. Global X Funds are not sponsored, endorsed, issued, sold, or promoted by Solactive AG nor does this company make any representations regarding the advisability of investing in the Global X Funds.