Data as of March 31, 2019 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS MARCH 2019 YTD
Alerian MLP Index (AMZX) 3.43% 16.82%
Alerian Midstream Energy Select Index (AMEIX) 3.88% 22.21%
ICE BofAML U.S. High Yield Energy Index (HY Energy) 0.55% 8.40%
S&P 500 Energy Index (S&P Energy) 2.11% 16.43%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

March closes out a stellar Q1 for energy: March brought to a close a stellar Q1 for the energy sector, driven by rallying markets and an improving commodity backdrop. The stock market had its best quarter since 2009, and S&P Energy’s 16.43% quarterly return was its own 7-year best. The AMEIX was up over 20%, buoyed by falling bond yields as well as another positive quarter for earnings. HY Energy outperformed the broader high yield market, though many of the lower-rated names have yet to fully recover from their December lows.1 All eyes in the commodity market have been on OPEC and Russian crude production data to gauge the level to which they are meeting supply-cut promises. Saudi Arabia has led the way on a 2.2 million bbl/day reduction for OPEC as of March.1 Meanwhile Russia, seen as less keen on the planned cuts, has reduced its own supply by 136,000 bbl/day through February, while signaling it plans further decreases.2 These tailwinds drove WTI crude prices to a 32.4% gain in Q1, the best since Q2 2009.1

Is there still upside for midstream? Midstream equities exploded out of the gates in 2019, with Q1 finishing as the best quarter for the AMZX and AMEIX since 2016 and 2009, respectively.1 In addition to rising commodity prices and broader equity strength, declining long-term interest rates made the dividend yields on midstream stocks even more enticing. With YTD returns north of 20%, it is fair to take a fresh look at sector valuations. Enterprise value/EBITDA (EV/EBITDA), a commonly used valuation metric in the sector,3 currently sits at 11.2 for the AMEIX, which is well below its historical median of 12.8. In fact, midstream is currently trading at a lower valuation multiple than utilities, another yield-based sector, which has never happened in the history of the index.1 While sector volatility and corporate reorganizations have likely contributed to this dynamic, we believe that higher return and dividend growth potential within midstream should support a higher multiple. While returns so far this year have been robust, valuation levels still suggest investors looking at the space may have not necessarily “missed the boat.”

KEY TAKEAWAY

  • Energy markets closed out a strong Q1 with their third consecutive month of positive returns.
  • Crude prices increased 32% in Q1 as production cuts have worked as intended.
  • While midstream has outperformed this year, we believe valuations remain at attractive levels.

1 Bloomberg.
2 IEA.
3 Bloomberg; EV/EBITDA references the ratio of enterprise value to median Bloomberg EBITDA estimates.


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.

The indices referenced herein are the exclusive property of each respective index provider and have been licensed for use by FS Investments. The index providers do not guarantee the accuracy and/or completeness of the indices and accept no liability in connection with the use, accuracy, or completeness of the data included therein. Inclusion of the indices in these materials does not imply that the index providers endorse or express any opinion in respect of FS Investments. Visit https://fsinvestments.com/support/articles/index-disclaimers for more information.


View our monthly commentary on the credit markets.


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.