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MLP Monthly Report: July 2017

Jul 13, 2017

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The July 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. On June 19th, EQT Corporation announced the acquisition of Rice Energy Inc. for $6.5 billion, making EQT the largest natural gas producer in the U.S. The transaction is expected to close by Q4 2017. Eventually, EQT Corp is expected to drop Rice’s midstream assets down to its midstream LP, EQT Midstream Partners.
  2. On June 30th, ONEOK Inc. (OKE) officially closed its roll-up merger with ONEOK Partners LP (OKS). OKE bought out the remaining units of OKS in a stock-for-stock transaction. This roll-up eliminates OKS’s cumbersome Incentive Distribution Rights payments and is expected to lower the combined company’s cost of capital.
  3. Oil markets have been bearish despite OPEC’s extension of production quotas at their May 25th meeting. Oil prices averaged $45.19 a barrel in June compared to $48.53 a barrel in May, representing a 6.9% drop. Lower oil prices in June are attributable to higher than expected U.S. inventory levels as well as rising production in Libya and Nigeria.

Sources: EQT Corporation, ONEOK Inc, Reuters, Bloomberg

Performance: Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, declined 0.38% last month largely due to lower oil prices. The index has fallen 0.66% over the last one-year period. (Source: Bloomberg)

Yield: The current yield on MLPs stands at 7.07%. MLP yields remained higher than the broad market benchmarks for High Yield Bonds (5.62%), Emerging Market Bonds (5.43%), Preferreds (5.40%), , and REITs (4.06%).1 MLP yield spreads versus 10-year Treasuries currently stand at 4.76%, higher than the long-term average of 3.68%. (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, fell marginally in June compared to May as falling oil prices weighed on MLP unit prices. Since June 2016, the EV-to-EBITDA ratio has increased by approximately 9.53%, as oil prices, and subsequently MLP equities, have risen during this time period. (Source: Bloomberg, MLPData, company financials).

Production Output: The Baker Hughes Rig Count rose by 32 rigs to 940 rigs compared to last month’s count of 908 rigs. The rig count has more than doubled since its recent low point in May 2016 of 404 rigs. US production of crude oil actually fell to 9,338 in thousands of barrels produced per day in the last week of June from 9,342 at the end of May as lower oil prices may have weighed on US crude production. (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

 

Category: Articles

Topics: MLPs

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Investing involves risk, including possible loss of principal. In addition to the normal risks associated with investing, 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. In addition, the Fund is non- diversified which represents a heightened risk to investors. Furthermore, the Fund invests in small and mid-capitalization companies, which pose greater risks than large companies. The Fund 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.

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. The index however is calculated without any deductions for taxes. As a result, the Fund’s after tax performance could differ significantly from the index even if the pretax performance of the Fund and the performance of the index are closely correlated.

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