MLP Monthly Report: October 2019
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.
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)
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).