Data as of April 30, 2019 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS APRIL 2019 YTD
Alerian MLP Index (AMZX) -1.33% 15.27%
Alerian Midstream Energy Select Index (AMEIX) -1.13% 20.84%
ICE BofAML U.S. High Yield Energy Index (HY Energy) 1.58% 10.13%
S&P 500 Energy Index (S&P Energy) 0.07% 16.51%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Energy space mostly flat in April: April saw most of the energy sector trading relatively flat, as stellar gains in Q1 gave way to more tepid investor sentiment. HY Energy outperformed equity indices as spreads narrowed another 30 bps, in line with the broader high yield market. Large, integrated producers (S&P Energy) gained for much of the month but faded toward the end of April and finished up just 0.07%. Midstream indices declined modestly, but the AMEIX and AMZX are still up 20.8% and 15.3%, respectively, this year. The outlook on crude prices, decidedly positive for most of the year, turned slightly more cautious toward the end of April. An end to U.S. waivers on Iranian crude sent Iran’s exports down 38% while Venezuelan production remains subdued. However, a 2-week, 15.4-million-barrel increase in U.S. inventories put pressure on prices, which declined 3.4% over the final week of the month. Data also showed that OPEC production climbed slightly and Russia again missed target supply cuts, exemplifying the difficulty in executing a supply reduction strategy across 15 countries.1

How high are midstream correlations? The energy sector has long been one of the market’s most volatile, thanks in large part to its reliance on unpredictable commodity prices. The midstream sector differs from most of the energy space in that it generally does not buy or sell commodity products. It instead gathers, processes and transports commodity products and is therefore commonly considered to have less direct commodity exposure. The data confirms that this is largely accurate. Over the past three years, the AMZX and AMEIX have a realized correlation of 0.41 and 0.50 to WTI crude prices. This compares to 0.63 and 0.68 for S&P Energy and upstream equities,2 respectively.1 If we want to look at a longer period, the data is similar: Over the past seven years, the midstream sector has shown correlations of about 0.5 to crude, while S&P Energy and upstream sit between 0.6 and 0.7.1 While these numbers may not be groundbreaking, they show that oil price volatility does not affect midstream in the same way it does other energy subsectors. Midstream companies are positioned to take advantage of continued U.S. production growth, and uniquely positioned to weather short-term crude price volatility better than many other energy subsectors.

KEY TAKEAWAY

  • After a strong Q1, energy markets largely took a pause in April.
  • Crude prices were close to flat as the supply environment grew slightly less supportive.
  • Midstream equities have shown lower correlation to oil prices than other energy subsectors.

1 Bloomberg.
2 Upstream equities represented by the S&P Oil & Gas Exploration & Production Select Industry Index.


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 Midstream Energy Select 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.