Data as of January 31, 2019 unless otherwise noted.
|PERFORMANCE (TOTAL RETURNS)|
|Alerian MLP Index (AMZX)||12.64%||12.64%|
|Alerian Midstream Energy Select Index (AMEIX)||16.06%||16.06%|
|ICE BofAML U.S. High Yield Energy Index (HY Energy)||6.28%||6.28%|
|S&P 500 Energy Index (S&P Energy)||11.11%||11.11%|
|Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.|
Oil prices rebound from December lows, energy markets rally: After a combination of macro factors and a general risk-off attitude caused a precipitous drop in crude prices during Q4, oil prices rebounded meaningfully in January. WTI crude prices ended the month at $53.82/bbl, up 18.5% in the largest monthly percentage gain since April 2016.1 Oil markets have been whipsawed by changing sentiment about global macro conditions, OPEC and Russian (OPEC+) production cuts, and U.S. sanctions on Iran and Venezuela. We believe increased volatility in commodity markets has caused energy investors to seek out areas of the market with less commodity exposure, such as infrastructure, as opposed to large-cap energy names. Both Alerian indices outperformed the S&P Energy index in January and have outperformed it by more than 550 bps over the past year. HY Energy posted a 6.28% gain on the month, aided by the increase in oil prices as well as the significant recovery in the high yield bond market.1 Data showed that OPEC, with Saudi Arabia leading the way, followed through with supply cuts in January—a positive for crude prices going forward.1
Midstream simplifications: Where are we, and how did we get here? One of the core themes for the energy infrastructure space over the past three years has been the uptick in MLP “simplifications.” Generally, this term refers to the consolidation of an MLP with its general partner with the surviving entity commonly structured as a corporation rather than an MLP. The past three years have seen 24 such transactions compared to just 11 in the preceding eight years.2 While these transactions may have heightened volatility in the midstream space, they are generally viewed as enhancing transparency, efficiency and corporate governance. So where are we in the process? While the majority of expected simplification transactions have been completed, there could still be more to come.3 The AMZX returned -10% on an annualized basis from 2015–2018, the time period during which simplifications have largely occurred. In contrast, the index gained 25% annualized from 2008–2014.1 While many factors have contributed to this reversal, the restructuring of the midstream space has certainly not helped. However, we are now in the later innings of this process, which could help set the stage for a more attractive midstream sector going forward.
- Energy markets recovered meaningfully as oil prices bounced back from December lows.
- Oil prices were supported by OPEC+ production cuts and U.S. sanctions on Iran and Venezuela.
- The wave of MLP simplifications is in its later stages and may be a positive for investors going forward.
2 Wells Fargo Research, Midstream Monthly Outlook, January 7, 2019.
3 Wells Fargo Research, Weekender: Local & Global, January 25, 2019.
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.
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.