Data as of October 31, 2019 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS OCTOBER 2019 YTD
Alerian MLP Index (AMZX) -6.22% 4.18%
Alerian Midstream Energy Select Index (AMEIX) -3.65% 15.02%
ICE BofAML U.S. High Yield Energy Index (HY Energy) -2.18% 0.34%
S&P 500 Energy Index (S&P Energy) -2.29% 3.57%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Energy sector underperformance continues: Energy markets declined in October despite broad equity markets gaining and crude prices remaining essentially flat. Midstream, which has outperformed other subsectors for much of the year, lagged in October. Markets have had to digest the reality that lower crude prices have slowed the rate of production growth in the U.S. Supply has grown 8% this year compared to 20% in 2018, while rig counts have declined by 21%.1 S&P Energy underperformed the broader index by 4.5%, as crude prices in the mid-$50s/bbl are clearly not enough to gets markets comfortable with large-cap energy. HY Energy continued to underperform the rest of the high yield market. The difference between spreads on energy bonds and the rest of the market hit 362 bps, the largest discrepancy since April 2016. The CCC and lower area of the market has been especially weak throughout the year.1

MLPs have been MIA in 2019 midstream rally: Despite midstream outperforming most of the energy sector so far in 2019, MLPs have lagged significantly behind infrastructure firms structured as C-corps. The AMZX has underperformed the AMEIX by 10.8% YTD, suggesting investor preference for C-corp structures.1 What could explain this performance discrepancy? First, there are simply fewer midstream MLPs than there were five years ago. Many large midstream bellwethers, such as Kinder Morgan and Enbridge, have done away with the MLP structure and converted to C-corps. This has left just a few large players, namely Energy Transfer, Enterprise Products Partners and MPLX, dominating the MLP space. Second, investors may simply view C-corps more favorably. Corporations tend to have better governance and transparency than firms structured as partnerships. Finally, corporations may have access to a broader investor base than publicly traded partnerships. They are more likely to be included in major indexes and thus may have access to demand from ETFs that track those indexes. Additionally, investors receive a 1099-DIV tax form rather than the laborious K-1 that MLP holders receive, making them more attractive to smaller investors. Whatever the reason, MLPs have materially underperformed midstream C-corps throughout the year, justifying the decisions by many firms to go through these complex restructurings.

KEY TAKEAWAYS

  • Energy markets traded up in September on a temporary global supply crunch.
  • MLP underperformance suggests investors may prefer companies structured as corporations.

1 Baker Hughes, Bloomberg Finance, L.P.


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.