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MLP Monthly Report: October 2019

Oct 23, 2019

View all Rohan Reddy's ArticlesRohan ReddyRohan Reddy

The October 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) Energy Transfer LP (ET) has announced that it will acquire SemGroup (SEMG) for $5 billion, funding the acquisition using 40% cash and 60% ET stock. The purchase price represented a 65% premium over the closing price of SEMG shares as of Sept 13. With this acquisition, ET could improve its capability to export to the Gulf Coast. The deal is expected to be closed in late 2019 or early 2020.

2) Crude prices have corrected back to the levels where they were before the drone attacks in Saudi Arabia, although around 5% of global oil supply was impacted by the incident. The major reason for this correction is oversupply from the US. Aramco will also be restoring its full capacity earlier than expected. Subdued demand for oil, mostly due to lowering optimism regarding the progress in US-China trade talks and the global economic slowdown, is also adding to these factors, suppressing oil prices.

3) Hess Midstream Partners LP (HESM) plans to convert its organizational structure from that of a Master Limited Partnership (MLP) to that of an Umbrella Partnership or an “Up-C” structure, eliminating the incentive distribution rights (IDRs) payments to the sponsor. An Up-C structure is a multi-share class ownership structure with certain tax benefits. HESM will name the new entity Hess Midstream LP.

Sources: Business Wire, Business Journal, Oilprice.com, CNBC, MarketWatch, Hess Midstream Partners L.P.

Performance: Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, went up by 1.44% last month. The index is down by -7.02% since last September. (Source: Bloomberg)

Yield: The current yield on MLPs stands at 8.34%. MLP yields remained higher than the broad market benchmarks for High Yield Bonds (5.65%), Emerging Market Bonds (5.19%), Fixed Rate Preferreds (5.15%), and Investment Grade Bonds (3.10%).1 MLP yield spreads versus 10-year Treasuries currently stand at 6.51%, higher than the long-term average of 4.54%.2

Valuations: The Enterprise Value to EBITDA ratio (EV-to-EBITDA), which seeks to provide more color on the valuations of MLPs, increased by 0.3% last month. Since September 2018, the EV-to-EBITDA ratio has fallen by approximately -24%. (Source: Bloomberg).

Crude Production: The Baker Hughes Rig Count fell last month to 860 rigs, falling by 44 rigs from last month’s count of 904 rigs. The rig count has more than doubled since its recent low point in May 2016 of 404 rigs. US production of crude oil stayed flat at 12.400 mb/d in the last week of September compared to August. (Source: Baker Hughes & EIA)

mlp performance

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 09/30/2019, Energy Transfer LP (ET) was a holding in the Global X MLP ETF (MLPA), with an 8.59% weighting and the Global X MLP and Energy Infrastructure ETF (MLPX), with a 4.17% weighting.

MLPX ETF and MLPA ETF do not have any holding in SemGroup (SEMG) and Hess Midstream Partners LP (HESM).

 

Category: Articles

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. 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. The Funds are non-diversified. 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 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.

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.

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.globalxfunds.com. Read the prospectus carefully before investing.