Data as of September 30, 2018 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS SEPTEMBER 2018 YTD
Alerian MLP Index (AMZX) -1.57% 5.90%
Alerian Energy Infrastructure Index (AMEIX) -1.72% -1.66%
ICE BofAML U.S. High Yield Energy Index (HY Energy) 0.81% 3.73%
S&P 500 Energy Index (S&P Energy) 2.59% 7.46%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Energy prices help lift upstream and integrated companies: Energy prices ticked up in September, with Brent crude reaching $80/barrel for the first time since 2014 and natural gas rising above $3/MMBtu.1 The crude market continues to show inventory drawdowns as global supply issues have hit the market. S&P Energy, which primarily contains large-cap energy stocks, took advantage, up 2.59% for the month and 7.46% YTD. Meanwhile, HY Energy finished off its second consecutive solid quarter, gaining 2.31% among strength in the broader high yield bond market.1 The midstream subsector showed weakness in September but was still positive overall in the third quarter. In particular, midstream was affected by outsized losses in a few names that are exposed to Colorado. The state has a proposition on the ballot in November that, if passed, would significantly decrease the amount of drillable land throughout Colorado. While neither national party supports the passage of Prop 112, due in part to the sizable loss in annual tax dollars from the oil & gas industry, the market has taken a cautious approach to exposed companies. While these regulatory issues are worth watching going forward, midstream fundamentals remain strong.2

How retail investors are accessing the midstream: The midstream subsector, and especially MLPs, has long been seen as attractive for retail investors due in part to the relatively high level of yield offered by the subsector. However, newly available data suggests that the way investors are accessing the midstream has changed in recent years. In 2008, retail investors accounted for about 50% of public MLP equity; in 2017, that number was down to only 40%.3 However, while direct retail ownership may generally be down, investors are increasingly more interested in MLP/energy infrastructure funds rather than investing directly in the companies. Mutual funds and ETFs now account for 12% of MLP equity ownership, up from 3% in 2008.2 This shift may be the result of any number of factors including investor preference for funds over individual securities, a trend toward passive indexing and, specific to MLPs, resistance to dealing with complicated K–1 tax forms. As of August 31, energy limited partnership funds had positive net flows of nearly $2 billion YTD.4 As midstream fundamentals improve, there may be an opportunity for funds to continue to replace direct allocations as the preferred vehicle for investing in midstream energy.2

KEY TAKEAWAY

  • Upstream and integrated oil companies bounced back in September while midstream performance was negative.
  • Risks in Colorado weighed on midstream sentiment.
  • Retail investors are increasingly using funds to access the energy infrastructure space.

1 Bloomberg.
2 Wells Fargo Research, “Midstream: CO Elections a Potential Setback?,” Sept. 24, 2018.
3 Wells Fargo Research, “Weekender: New MLP Ownership Data Tells a Different Narrative,” Sept. 28, 2018; PWC.
4 Morningstar.


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.


Read 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.