Data as of May 31, 2018 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS MAY 2018 YTD
Alerian MLP Index (AMZX) 5.05% -0.93%
Alerian Energy Infrastructure Index (AMEIX) 5.04% -4.08%
ICE BofAML U.S. High Yield Energy Index (HY Energy) 0.47% 0.76%
S&P 500 Energy Index (S&P Energy) 3.04% 6.05%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

The midstream rally continues: All four energy benchmarks realized positive returns in May, which marked the second consecutive month during which both the AMZX and AMEIX recorded returns north of 5%. S&P Energy, which has a relatively higher weighting toward upstream companies, has benefited over the past couple months from climbing oil prices. While the commodity price backdrop continued to be generally supportive for both midstream and upstream companies, oil prices did decline slightly this month as OPEC and its partners, including Russia, indicated they could decide to increase supply at their meeting in June. This news caused S&P Energy to give back some of its gains at the end of the month while the AMEIX and AMZX, which are generally thought to be less commodity-sensitive, maintained their strong returns. HY Energy posted positive returns but lagged the other benchmarks given the already high average prices of many energy credit issuers.

Wave of corporate “simplification” transactions: While the Federal Energy Regulatory Commission (FERC) ruling in March may have ended up expediting the process, the trend of MLPs looking to transition into more traditional C-corps has been a topic of great interest in the midstream sector for the past few years. In May the market saw a breakthrough in this regard, as the number of MLPs was reduced by five. Enbridge, Inc. (ENB) bought up EEP, EEQ and SEP, while Cheniere Energy, Inc. and Williams Companies, Inc. each acquired their respective MLPs. On top of this, there are several more transactions that may be finalized in the near future.1 Given changing tax laws and investor preferences, the market is now placing a premium on midstream C-corps instead of MLPs, which trade at an 11.6x EV/EBITDA multiple, versus 10.6x for large-cap midstream MLPs. The conversion to a C-corp structure is no sure thing, but many companies are betting that a simpler structure and better access to investors will help drive returns.2

KEY TAKEAWAY

  • The energy market saw its second straight positive month with the AMZX and AMEIX outperforming both S&P Energy and HY Energy.
  • Energy midstream and infrastructure saw broad-based gains, with U.S. C-corps, U.S. MLPs, Canadian infrastructure companies and U.S. general partners all posting positive returns.
  • May saw five “simplification” transactions, which involve converting or rolling an MLP into a C-corp structure.

1 Wells Fargo, “Weekender: It’s Happening!”, May 18, 2018.
2 Wells Fargo, “Midstream: Simplification Mania”, June 1, 2018.


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.