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MLP Monthly Report: November 2017

Nov 15, 2017

View all Rohan Reddy's ArticlesRohan ReddyRohan Reddy

The November 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) Enterprise Products Partners L.P. (EPD) announced they would be cutting their distribution growth guidance in half, raising distributions by $0.0025 a quarter instead of $0.005. This policy will be effective through 2018. Management stated their reasoning as, “You’ve not see the market rewarding the distribution growth that we have been paying out.”

2) Genesis Energy, L.P. (GEL), cut their distribution by 31%, resetting the distribution to $0.50/quarter after previously raising their distribution for 48 straight quarters. Going forward, GEL will increase its quarterly distribution by at least $0.01 per common unit.

3) Holly Energy (HEP) announced they reached an Incentive Distribution Right (IDR) buyout agreement with their General Partner, HollyFrontier (HFC), in exchange for $1.25 billion in equity common units. In addition, HollyFrontier will waive $2.5 million of limited partner (LP) cash distributions per quarter for twelve quarters, representing a total savings to HEP of $30 million.

Sources: Bloomberg, Enterprise Product Partners L.P., Genesis Energy, L.P., Businesswire, HollyFrontier Corp.

Performance: Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, fell -5.38% last month as the market took a negative outlook regarding the recent changes in certain MLP distribution policies. The index has fallen -7.11% over the last one-year period. (Source: Bloomberg)

Yield: The current yield on MLPs stands at 8.08%. MLP yields remained higher than the broad market benchmarks for High Yield Bonds (5.43%), Fixed Rate Preferreds (5.32%), Emerging Market Bonds (5.30%), and REITs (3.97%).1 MLP yield spreads versus 10-year Treasuries currently stand at 5.70%, higher than the long-term average of 3.78%. (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 by -1.45% in October compared to September as MLP equity prices dropped due to tapered expectations of distribution growth. Since October 2016, the EV-to-EBITDA ratio has increased by approximately 17%. (Source: Bloomberg).

Crude Production: The Baker Hughes Rig Count fell last month to 909 rigs, dropping by 31 rigs compared to last month’s count of 940 rigs. The rig count has more than doubled since its recent low point in May 2016 of 404 rigs. Rig counts may be leveling off as well economics improve and near-term upstream Capital Expenditure (CapEx) spending scales back. US production of crude oil fell marginally to 9.553 mb/d in the last week of October compared to 9.561 mb/d at the end of September, as the effects of Hurricane Nate weighed on production in the Gulf of Mexico region. (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: Reports

Topics: MLPs

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.  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.

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 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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