Data as of April 30, 2018 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS APRIL 2018 YTD
Alerian MLP Index (AMZX) 8.09% -3.92%
Alerian Energy Infrastructure Index (AMEIX) 5.22% -8.68%
ICE BofAML U.S. High Yield Energy Index (HY Energy) 1.26% 0.29%
S&P 500 Energy Index (S&P Energy) 9.36% 2.93%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

A relief rally in midstream: Following a difficult two months for midstream investors that saw index levels for the AMZX and AMEIX hit lows not seen since April and June 2016, respectively, midstream stocks rallied in April. The Federal Energy Regulatory Commission (FERC) ruling from March 15, as discussed last month, remains top of mind, but many midstream companies have suggested that they expect the negative earnings implications to be minimal. Importantly for returns in April, continued rising U.S. oil production and commodity prices set the stage for a positive fundamental backdrop across the entire energy spectrum. Oil production in 2018 is now expected to surpass the previous high set in 1970, and prices in April hit the highest levels since December 2014.1,2 While these fundamentals have supported S&P Energy, which contains a large weighting in upstream companies, there are favorable implications for midstream as well. In particular, the oil price differential in the Permian Basin, which is a sign of tightening pipeline capacity as the cost to transport oil out of the basin rises, hit its highest level in 3.5 years in early April.3

Divergent energy valuations: The past year has seen some volatile and divergent returns for various energy subsectors. Not surprisingly, subsector valuations have also drifted further apart, even though positive underlying fundamentals underpin nearly the entire sector. MLPs and midstream C-corps are currently trading at a 21% and 17% discount, respectively, to their 10-year average enterprise value to EBITDA (EV to EBITDA) multiple.4 Refiners, integrated exploration & production, and utilities, however, are trading at a 38%, 20% and 22% premium, respectively, to their 10-year average.4 This is against a backdrop where the broader S&P 500 Index trades at a 27% premium to its 10-year average.4,5 If the fundamentals for midstream stay positive, we believe this subsector could have room to move even higher.

KEY TAKEAWAY

Energy markets broadly rebounded in April on the heels of increasing commodity prices and improving fundamentals. AMZX outperformed the AMEIX as MLPs, which comprise 100% of the AMZX, rebounded more strongly compared to the more diversified AMEIX following the FERC-driven sell-off in March. Midstream valuations look particularly attractive compared to other energy subsectors and to the broader market.


1 ICIS, “US on pace for record oil, natgas production in 2018,” April 10, 2018, https://bit.ly/2w3rfmF.
2 Bloomberg.
3 Wells Fargo, “Weekender: Permian Oil Refresh,” April 20, 2018.
4 Wells Fargo, “Midstream Monthly Abridged Edition,” April 10, 2018.
5 The S&P 500 Index is a benchmark of large-cap U.S. equities. The index includes 500 leading companies, captures approximately 80% coverage of available market capitalization and assumes all resulting dividends are automatically reinvested.


Index descriptions: Alerian MLP Index is the leading gauge of energy Master Limited Partnerships (MLPs) and is a float-adjusted, capitalization-weighted index, whose constituents represent approximately 85% of total float-adjusted market capitalization. Alerian Energy Infrastructure Index is a composite of North American energy infrastructure companies and is a capped, float-adjusted, capitalization-weighted index, whose constituents are engaged in midstream activities involving energy commodities. ICE BofAML U.S. High Yield Energy Index is designed to track the performance of U.S. dollar-denominated high yield rated corporate debt publicly issued in the U.S. domestic energy market. S&P 500 Energy Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) energy sector.


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This energy market commentary and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The energy market commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such energy market commentary. The energy market commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the energy market commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.