May performance reflected improving sentiment as COVID-19 containment efforts ease in many locations. Furthermore, midstream investor anxieties may have been calmed by efforts to improve free cash flow generation and financial results that have exceed Wall Street’s expectations.

MLP Market Overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended May up 6.9% on a price basis and up 9.0% once distributions were considered. The AMZ results outperformed the S&P 500 Index’s 4.8% total return for the month. The best performing midstream subsector for May was the Compression group, while the Natural Gas Pipeline subsector underperformed, on average.

For the year through May, the AMZ is down 33.8% on a price basis, resulting in a 30.3% total return loss. This compares to the S&P 500 Index’s 5.8% and 5.0% price and total return losses, respectively. The Propane group has produced the best average total return year-to-date, while the Gathering and Processing subsector has lagged.

MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, narrowed by 103 basis points (bps) over the month, exiting the period at 1,022 bps. This compares to the trailing five-year average spread of 620 bps and the average spread since 2000 of approximately 400 bps. The AMZ indicated distribution yield at month-end was 10.9%.

Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $5.2 billion of debt during the month. MLPs and affiliates announced $48 million of new asset acquisitions over the month.

Spot West Texas Intermediate (WTI) crude oil exited the month at $35.49 per barrel, up 88.4% over the period and 33.7% lower year-over-year. Spot natural gas prices ended May at $1.70 per million British thermal units (MMbtu), up 2.4% over the month and 33.1% lower than May 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $17.06 per barrel, 51% higher than the end of April and 13.4% lower than the year-ago period.

News

First quarter earnings season winds down. First quarter reporting season was mostly complete at the end of May. Through month-end, 55 midstream entities had announced distributions for the quarter; including six distribution increases, 19 reductions, and 30 unchanged from the previous quarter. Over the same time, 56 sector participants had reported first quarter financial results. Operating performance was, on average, better than expectations with EBITDA— Earnings Before Interest, Taxes, Depreciation and Amortization—coming in 2.2% higher than consensus estimates but 1.0% lower than the preceding quarter.

Williams inks a few deals and gets greener. Williams (WMB) announced an agreement with Chevron (CVX) and Total (TOT) to provide offshore natural gas transportation services to the Anchor development in the Gulf of Mexico. Late in the month press reports indicated WMB also agreed to supply natural gas to the Golden Pass LNG facility. Separately, WMB announced plans to develop solar energy installations at its facilities to provide electricity to the company’s existing natural gas transmission and processing operations.

Chart of the month: demand recovery underway

As portions of the United States slowly reopen, demand for refined petroleum products, such as gasoline, have bounced off the pandemic lows hit in mid-April. The Chart of the Month shows the four-week moving average of U.S. Product Supplied of Finished Motor Gasoline from the U.S. Energy Information Administration (EIA’s) Petroleum Status Weekly, and implied demand figure derived from changes in storage and considering refinery utilization and other factors. Demand remains impaired but is improving.

Figure 1: 4-Week Average U.S. Product Supplied of Finished Motor Gasoline (Thousand Barrels per Day)

All data sourced from Bloomberg L.P. as of 5/31/2020 unless otherwise stated

Important Information

Blog Header Image: Bob Krist / Getty

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask a financial professional for a prospectus/summary prospectus or visit invesco.com.

The opinions referenced above are those of the author as of June 11, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc.

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.

Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. Diversification does not guarantee profit or protect against loss.

The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

June MLP performance seemed to reflect a reversal of sentiment as COVID-19 cases returned in certain regions. That likely influenced the near-term trajectory of what appeared to be improving energy consumption. Despite a softer market, some midstream companies advanced new projects and completed corporate simplification transactions.

MLP market overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended June down 7.9% on a price and total return basis. The AMZ results underperformed the S&P 500 Index’s 2.0% total return for the month. The best performing midstream subsector for June was the Compression group, while the Diversified subsector underperformed, on average.

For the year through June, the AMZ is down 39.0% on a price basis, resulting in a 35.7% loss once distributions were considered. This trails the S&P 500 Index’s 4.1% and 3.1% price and total return losses, respectively. The Propane group has produced the best average total return year-to-date, while the Gathering and Processing subsector has lagged.

MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, widened by 108 basis points (bps) over the month, exiting the period at 1,122 bps. This compares to the trailing five-year average spread of 630 bps and the average spread since 2000 of approximately 402 bps. The AMZ indicated distribution yield at month-end was 11.9%.

Midstream MLPs and affiliates raised $800 millionin new marketed equity (common or preferred, excluding at-the-market programs) and $2.9 billion in debt during the month. No new asset acquisitions were announced during June.

Spot West Texas Intermediate (WTI) crude oil exited the month at $39.27 per barrel, up 10.7% over the period and 32.8% lower year-over-year. Spot natural gas prices ended June at $1.64 per million British thermal units (MMbtu), down 3.5% over the month and 32.2% lower than June 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $17.05 per barrel, 0.1% lower than the end of May and 12.4% lower than the year-ago period.

News

EPD inks supply agreement for PDH 2. Enterprise Products Partners (NYSE: EPD) announced the execution of a long-term agreement to supply propylene to Marubeni Corp from EPD’s second propane dehydrogenation plant (PDH). The plant is currently under construction and expected to be put into service in 2023. EPD also announced stronger than expected operating results from its ethylene export terminal at Morgan’s Point, Texas while advancing its expansion via ongoing construction of storage and additional supply connections.

Line 5 temporarily shut. A Michigan Circuit Court granted Michigan Attorney General Dana Nessel’s motion for a temporary restraining order requiring Enbridge (NYSE: ENB) to cease all transport operations of its Line 5 and disclose additional information following the discovery of damage to an anchor support.

ETRN closes acquisition of EQM. Equitrans Midstream Corporation (NYSE: ETRN) closed the acquisition of EQM Midstream Partners (NYSE: EQM); the final meaningful step in the companies’ simplification process.

Chart of the month: Associated gas, once a drag, may now begin to help natural gas prices

Pricing for natural gas has been challenged for many years as supply growth has exceeded demand growth. Unbeknownst to some, the robust supply of natural gas is the direct result of increased oil production. Most oil wells also produce some natural gas, and production of this “associated gas” has been rising substantially alongside the growth of crude oil produced from shale. However, the sharp decline in the rig count of primary crude oil shale plays in recent months has likely changed the trajectory of associated gas production and may benefit natural gas pricing, and production from dry gas basins, in the years ahead. The situation is similar for natural gas liquids.

Figure 1: Drilling activity and production of natural gas from key US oil basins

Important Information

Blog Header Image : Matthias Kulka / Getty

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask a financial professional for a prospectus/summary prospectus or visit invesco.com.

The opinions referenced above are those of the author as of July 1, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc.

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.

A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level, calculated by deducting the yield of one instrument from the other. 

Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. Diversification does not guarantee profit or protect against loss.

The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

July brought modest midstream equity price weakness despite positive commodity price movements. Quarterly earnings season kicked-off, the first to include meaningful impact from the ongoing battle with COVID-19 and the resulting impact on global demand for hydrocarbons.

MLP market overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended July down 4.8% on a price basis and down 3.6% once distributions are considered. The AMZ results underperformed the S&P 500 Index’s 5.6% total return for the month. The best performing midstream subsector for July was the Compression group, while the Petroleum Pipeline subsector underperformed, on average.

For the year through July, the AMZ is down 41.9% on a price basis, resulting in a 38.1% total return loss. This compares to the S&P 500 Index’s 1.2% and 2.4% price and total returns, respectively. The Propane group has produced the best average total return year-to-date, while the Marine subsector has lagged.

MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, widened by 82 basis points (bps) over the month, exiting the period at 1,194 bps. This compares to the trailing five-year average spread of 643 bps and the average spread since 2000 of approximately 405 bps. The AMZ indicated distribution yield at month-end was 12.5%.

Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $3.0 billion of debt during the month. No new asset acquisitions were announced in July.

Spot West Texas Intermediate (WTI) crude oil exited the month at $40.27 per barrel, up 2.5% over the period and 31.3% lower year-over-year. Spot natural gas prices ended July at $1.80 per million British thermal units (MMbtu), up 5.0% over the month but 20.7% lower than July 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $18.77 per barrel, 10.1% higher than the end of June and 2.6% higher than the year-ago period.

News

Second quarter earnings season begins. Second quarter reporting season began in July. Through month-end, 47 midstream entities had announced distributions for the quarter, including four distribution increases, four reductions, and 39 distributions that were unchanged from the previous quarter. Through the end of July, 13 sector participants had reported second quarter financial results. Operating performance has been, on average, better than expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 3.9% higher than consensus estimates but 9.8% lower than the preceding quarter.¹

Warren Buffett buys more midstream. Dominion Energy (NYSE: D) announced the sale of the company’s midstream assets to an affiliate of Warren Buffet’s Berkshire Hathaway (NYSE: BRK/A) in a transaction valued at $9.7 billion.² The transaction includes more than 7,700 miles of natural transmission pipelines and about 900 billion cubic feet of gas storage. Berkshire’s existing midstream portfolio includes natural gas pipeline systems in the Midwest (Northern Natural Gas) and Western United States (Kern River).

CNX Midstream gets acquired by its parent. CNX Resources (NYSE: CNX) announced plans to acquire the public stake in CNX Midstream Partners LP (NYSE: CNXM), in an all-stock transaction valued at $357 million, a 28% premium to CNXM’s last closing price. CNX Midstream Partners holders will receive 0.88 shares of CNX for each CNXM unit. The transaction is expected to close during the fourth quarter of 2020.

Chart of the Month: crude oil, more than just gasoline

A barrel of crude oil provides more than just gasoline including many products used daily in households everywhere.

1  Source: Bloomberg, L.P., and Invesco SteelPath research team, as of 7/31/20

2  Source: Dominion Energy company press release, 7/6/20

3  Source: CNX Resources press release, 7/27/20.

Important Information

Image credit: Dimitry Anikin / Unsplash

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask a financial professional for a prospectus/summary prospectus or visit invesco.com.

The opinions referenced above are those of the author as of August 11, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc.

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. An investment cannot be made directly into an index. Past performance does not guarantee future results.

A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level, calculated by deducting the yield of one instrument from the other. 

Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. Diversification does not guarantee profit or protect against loss.

The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Prior to the onset of the coronavirus pandemic, real estate investment trusts (REITs) had been among the better performing asset classes over the longer term.¹ In the wake of the pandemic, however, REITs have been dogged by market commentary and investor misconceptions that imply the asset class has become a challenged sector. We disagree.

REITs in a post-COVID world, in our view, can be separated into three categories: 1. property sectors with continued tailwinds, 2. sectors with short-term coronavirus impacts but strong recovery potential, and 3. sectors with longer-term uncertainties.  Active managers with the ability to balance exposure between structural growth and attractive value while avoiding the trouble spots may be well positioned to navigate the new market environment. Looking beyond the current turmoil to a period when the capital markets have stabilized, investors can likely expect structurally lower interest rates and slower economic growth. A low rate and slow growth environment has historically been favorable for commercial real estate and may prove to be so again.

Potentially attractive opportunities in commercial real estate. US REITs generated a 29% total return in 2019 and have been among the better performing asset classes over the last 15 years.2 (See Figure 1.) But since the pandemic hit and the world went into lockdown, market commentators have speculated about the longer-term impact of COVID-19 on commercial real estate. Their outlooks are often guarded and frequently paint all property types with the same broad brush. Not surprisingly, some investors have become more cautious on the asset class. It is certainly true that the historic collapse in the economy and concomitant spike in unemployment have been headwinds for real estate—just as they have been for most industries. In our view, however, this broad-brush approach to real estate is misplaced. We believe there are opportunities for potentially attractive returns combined with solid risk-adjusted returns in both US and global real estate today; just as there were in the wake of the global financial crisis, the dot-com bust and even the Gulf War recession 30 years ago.

Figure 1: Attractive total returns
Real estate has outperformed traditional stocks and bonds

Segmenting the real estate market in a post-COVID world. There are more than a dozen distinct property types in the listed US real estate market and the global market.3 (See Chart 2.) Because various property types will be impacted by the coronavirus differently, we think it makes sense for investors to segment the market by growth opportunity as well as human density. The latter attempts to assess the longer-term impact of the coronavirus and the risk of persistent social distancing by property type. In a post-coronavirus world, we believe the real estate market can properly be segmented into three categories: 1. property sectors with continued tailwinds (often driven by technological change); 2. sectors with shorter-term impacts from COVID but with strong recovery potential (typically driven by persistent demographic trends); and 3. sectors with longer-term uncertainties. The key point is simple; commercial real estate is comprised of various property types driven by different growth dynamics facing different impacts from COVID. Some of the highest growth property sectors account for over 40% of the US listed real estate market and face little to no impact from COVID. In contrast, some of the most challenged sectors comprise just 5% of the market. 

Figure 2: US real estate property type exposures
As of May 31, 2020

Sectors with continued tailwinds. Three property sectors below account for 44% of the listed US real estate market and enjoyed structural tailwinds before the pandemic because of their locus at the intersection of technology and real estate, meaning they will likely face limited effects from the coronavirus. In fact, demand for several of these property types may have even improved as a result of the pandemic. 

Infrastructure (22% of US market): Infrastructure REITs, which include cell phone tower operators, small node providers and fiber players, had benefited from strong growth in mobile data usage before the pandemic. They are also meaningful beneficiaries of the wireless network upgrade to 5G and have even benefitted from the current work-from-home environment which has significantly increased the load on wireless networks. Since this sector has almost no human density, it is largely unaffected by the coronavirus. Unsurprisingly, these REITs have generated positive total returns year-to-date despite a challenging market environment.4

Data centers (11% of US market): Data centers REITs, which are basically high security computer warehouses, had also benefited from the consistent growth in data usage before the pandemic. These facilities are essential for the fast and efficient operation of the internet, and they are beneficiaries of growth in cloud computing, e-commerce and the work-from-home economy. Since they too have very limited human density, data centers have been largely unimpacted by the coronavirus. Not surprisingly, many data center REITs have generated positive total returns year-to-date as well.5

Industrial (11% of US market): Industrial REITs, which include gateway distribution centers, bulk warehouses, infill warehouses and more cyclical property types as well, have been significant beneficiaries of the 11-year expansion in the US economy as well as consistent growth in e-commerce. They have also benefitted from the advent of no-touch home delivery, serving as important components in the last mile of the distribution chain. The impact on this sector of the current recession, the slowdown in global trade and COVID will vary depending on property type. For example, a longer-term disruption in trade could cause a drawdown in warehouse inventories without the goods being replaced, a negative impact for certain businesses. On the other hand, the massive bulk warehouses that are primarily operated with robots have low human density and should face limited impact from the coronavirus. Once the economy starts to grow again, we would expect trade volumes to increase which should meaningfully benefit this sector.

Sectors with shorter-term impacts from COVID but strong recovery potential. Several property types could face shorter-term impacts from the pandemic but likely have strong recovery potential. These sectors are beneficiaries of demographically-driven growth trends. As the markets stabilize and those demographic trends continue, these property types should participate well in the recovery.

Residential (14% of US market): Residential REITs, which include apartments, single-family rentals, manufactured homes and student housing, have benefitted from a host of factors including structural undersupply, demographically-driven demand growth and relative affordability. Growth trends were positive before the pandemic, especially for higher quality assets in more attractive markets with limited exposure to new supply. We expect the impact of COVID on this sector to vary depending on the specific property type. For example, single family rental homes in the suburbs and manufactured housing have low human density and should be relatively unimpacted. In contrast, high rise apartments in dense urban areas where residents rely heavily on public transportation could be more significantly impacted.

While occupancy rates for apartments have declined marginally during the current recession, some of these headwinds are likely discounted into stock prices.  For example, apartments on average were trading at a 16% discount to net asset value (NAV) by the end of May.6 For reference, on a longer-term basis, US REITs have typically traded at a 2%-3% premium to NAV.⁷ Furthermore, key support for this sector comes from the fact that we all need a place to live, and rent is typically the first check people write

Healthcare, excluding senior living (~8% of US market): Healthcare REITs (excluding senior living) consist of hospitals, medical offices, skilled nursing and life science facilities. These property types have also benefitted from demographically-driven demand growth and the aging of the baby boomer cohort. However, future growth prospects for this sector and the expected impact from the coronavirus vary by property type. For example, life science and laboratory properties enjoyed solid demand prior to the pandemic, especially those facilities located near innovation hubs and major medical/research facilities. For certain tenants, the cost of relocating sophisticated medical and scientific equipment is extremely high, making those tenants sticky and highly valuable. Similarly, the demand for medical offices, especially near high-acuity hospitals, was solid before the pandemic and will likely remain so. Although certain of these property types have been negatively impacted by the coronavirus to varying degrees, they often house essential businesses such as doctors’ offices, testing/treatment facilities and research labs that have become critical in the current environment. On the other end of the spectrum, senior housing was already facing softening fundamentals before the pandemic. We believe it is even more challenged today, in part because it serves a demographic that is particularly susceptible to COVID. Accordingly, we would expect senior housing to lag in a real estate recovery. 

Lodging (2% of US market): Lodging REITs, which include hotels and resorts, were performing well before the pandemic. The US was in the 11^th year of an economic expansion, the stock market was at an all-time high, and both consumers and businesses were spending on travel. But once the lockdown went into effect, occupancy rates for many hotels and resorts collapsed to zero. A defining characteristic of this sector is its short lease terms, often just one day. In addition, these property types can be impacted by COVID, especially facilities that cater to international travelers. We believe that some of these challenges are likely discounted into stock prices as the sector on average was trading at a 29% discount to NAV by the end of May.8 As the economy has started to reopen, occupancy rates have started to rebound, but the recovery has been uneven. Properties located within driving distance of major metropolitan areas seem to be rebounding the fastest so far.

Timber (2% of US market): Timber REITs own land that is used for the production and harvesting of timber. They generate revenue by selling raw timber and wood-based products. On the upside, demand for wood products tends to grow as the populations need for housing increases. In addition, these REITs do not own buildings, so they face minimal impact from the coronavirus.  However, timber REITs are cyclical and generate income based on market prices which are partly a function of demand. In this regard, approximately half of U.S. softwood lumber is used for homebuilding, so wood demand is highly correlated with the strength of the housing market. In the current recession, housing starts have fallen sharply. As the economy stabilizes and housing starts rebound, we expect demand for timber and wood products to rebound as well.

Sectors facing longer-term uncertainties. Finally, several property types faced challenges before the pandemic and continue to face uncertainties today. 

Retail ex essential services (5% of US market): Retail REITs (excluding essential services) consist of regional malls and shopping centers.  Before the pandemic, these property types faced a host of challenges. Unfortunately, they have been hit hard by COVID as most malls and shopping centers closed during the height of the pandemic. Rent collections for some landlords fell into the 45%-55% range during the three-month period ending in June.⁹ Looking more broadly, there are approximately 1,200 large malls in the U.S. Before the pandemic, approximately half or more of these malls were on the path to shutdown over the next decade. The start of the pandemic has likely accelerated that process, but by how much is unknown. Persistent social distancing will likely shift more discretionary retail purchases online, and the current recession could amplify the struggles of many large retail chains, sending more of them into bankruptcy. Current valuations seem to be reflecting at least some of these headwinds. By the end of May, regional malls on average were trading at a 52% discount to NAV while shopping centers were trading at a 35% discount.¹⁰ We would expect these property types to lag in an economic recovery. 

Office (7% of US market): Office REITs in our view represent a question mark in real estate today. Prior to the pandemic, demand for marquee properties in major economic centers and innovation hubs was solid. Employers would often compete for top-flight talent based on the location quality, and related amenities/services of their offices. At the same time, demand at the lower end of the market was softening. Because of the coronavirus and the risk of persistent social distancing, we believe it is unclear what the long-term demand will be for office space in terms of square foot per employee. Some companies have already announced that a portion of their workforce will be eligible to work from home on a permanent basis, thereby reducing the need for office space. In addition, the workplace trend over the last decade of greater employee densification on the office floorplan has likely come to an end. However, we believe there will be continued demand for marquee and other high-end office properties in a post-COVID world. In addition, employers will have to consider a variety of issues when employees return to the office, including social distancing requirements and spacing demands. Of course, it is possible that certain employers may need more square feet of office space per employee in a post-COVID environment. For all of these reasons, we believe the outlook for this sector is hazy. However, some of this uncertainty is likely discounted into stock prices as the sector on average was trading at a 23% discount to NAV by the end of May.¹¹

Key takeaways. We believe that much of the recent market commentary regarding listed US and global real estate has been too pessimistic, painting different property types with the same broad brush and leaving investors with the impression that the asset class has become challenged. In our view, certain property sectors continue to benefit from structural tailwinds while others face short-term coronavirus effects but have strong recovery potential. At the same time, a small part of the listed real estate market faces longer-term uncertainties. Active managers with the ability to balance exposures between structural growth and attractive value while avoiding the trouble spots should be well positioned to navigate the new market environment. In our view, once the market turmoil subsides, US and global REITs that own high-value physical assets, have a stable tenant base along with historically stable and growing cash flows, and offer attractive yields could present a potentially attractive investment opportunity, just as they did in the wake of the global financial crisis.

Investors seeking information about Invesco Global Real Estate Income Fund can find additional information here.

Investors seeking information about Invesco Real Estate Fund can find additional information here.

Investors seeking information about Invesco Global Real Estate Fund can find additional information here.

Footnotes

Past performance is not a guarantee of future results.

1. Source: Bloomberg L.P., as of 5/31/2020. US REITS represented by the FTSE Nareit All Equity REITs Index; Global REITs represented by the FTSE EPRA Nareit Developed Index; US Equities represented by the S&P 500 Index; Global Equities represented by the MSCI World Index; US Bonds represented by the Bloomberg Barclays US Aggregate Index; Global Bonds represented by the Bloomberg Barclays Global Aggregate Index.

The FTSE EPRA/Nareit Developed Index is a free-float adjusted, market capitalization-weighted index designed to track the performance of listed real estate companies in developed countries worldwide. 

The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets.

2. Source: Bloomberg L.P., as of 6/23/20

3.  The US real estate market is represented by the FTSE Nareit All Equity REITs Index and the global real estate market is represented by the FTSE EPRA Nareit Developed Index. See FTSE Russell Sector Indices Factsheet, 5/29/20.

4. Source: Bloomberg L.P., Total return YTD as of 6/30/2020 is 16.60%. Past performance is not a guarantee of future results.

5. Source: Bloomberg L.P., as of 6/23/20. Total return YTD as of 6/30/2020 is 19.18%. Past performance is not a guarantee

6. Source: Invesco Real Estate based on consensus estimates, 5/31/20.

7. Source: Bloomberg L.P., as of 6/23/20

8. Source: Invesco Real Estate based on consensus estimates, 5/31/20.

9. Source: Invesco Real Estate based on consensus estimates, 5/31/20.

10. Source: Invesco Real Estate based on consensus estimates, 5/31/20.

11. Source: Invesco Real Estate based on consensus estimates, 5/31/20.

Important Information

Blog Header Image: Alex Shutin / Unsplash

A risk-adjusted return is a calculation of the profit or potential profit from an investment that takes into account the degree of risk that must be accepted in order to achieve it. 

The Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.

Global REITS are represented by FTSE EPRA/NAREIT Global Index is designed to track the performance of listed real estate companies and REITs in both developed and emerging markets

The FTSE NAREIT All Equity REITs Index is an unmanaged index considered representative of U.S. REITs Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions, there can be no assurance that actual results will not differ materially from expectations. An investment cannot be made into an index.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

 Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.

REITs are subject to additional risks than general real estate investments. The value of a REIT can depend on the structure and cash flow generated by the REIT. REITs concentrated in a limited number or type of properties, investments or narrow geographic areas are subject to the risks affecting those properties or areas to a greater extent than less concentrated investments. REITs are subject to certain requirements under federal tax law and may have expenses, including advisory and administration expenses. As a result, Fund will incur its pro rata share of the underlying expenses.

Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds, and is an indirect, wholly owned subsidiary of Invesco Ltd.

NA6946

We encounter petroleum¹ products on an almost constant basis – like something as inconspicuous as an iPhone case or as essential as indoor plumbing. Though petroleum is synonymous with automobiles, this represents less than half of petroleum demand. Perhaps surprisingly, an almost equivalent amount of petroleum demand is derived from non-transportation sources. Where else do we encounter petroleum products? How about in milk cartons, golf balls, MRI scanners, lipstick, crayons, and solar panels.

Regardless of its ubiquity, petroleum is often vilified for its role in the environment, primarily from use as transportation fuel. Today, transportation accounts for 14% of global greenhouse gas emissions, with approximately two-thirds coming from cars and trucks.² Agriculture, industrial, and power are all bigger emitters. As a feedstock for materials and polymers, the problem with petroleum here is not so much with emissions – since it is chemically reformulated versus combusted – but disposal. Though progress continues towards reducing the environmental impact, petroleum is nevertheless a vital component to a functioning global economy and to sustaining and improving living standards globally. In this blog we explore the essential role of petroleum products, what is being done to minimize the negative impacts, and the practical reality of alternatives.

Petroleum meaningfully improves the standard of living for people globally

Petroleum is used as feedstock to make everyday products, ranging from products large and small, recreational and essential. In healthcare, this includes medicine bottles, IV bags, ventilators, personal protective equipment, and hand sanitizers. For recreational items, these include tents, bikes, canoes, rope, backpacks, and fishing poles. Other applications include detergents, home insulation, carpets, furniture, food packaging, diapers, and vehicle bumpers and instrument panels. The list is endless. Petroleum products are used in so many applications because it can be engineered – optimizing its features for being lightweight, durable, corrosion-resistant, and cost-effective – to serve a specific purpose.

But aside from these every day, often mundane aspects, petroleum is essential in providing billions of people with humane living standards: clean water, sanitation, and clean burning fuel, to name a few. For example, petroleum is a feedstock to produce polyvinyl chloride, commonly known as PVC. Indoor plumbing and water infrastructure rely heavily on PVC pipe because of its durability, moldability, recyclability, and cost-effectiveness. Without PVC, more expensive alternative materials, such as steel or copper, would inhibit the proliferation of indoor plumbing and water infrastructure, specifically in developing nations. According to the World Health Organization (WHO), two billion people still do not have basic sanitation facilities such as toilets or latrines, and without effective, low-cost materials such as PVC, these basic sanitation needs will go unmet much longer than necessary.

Propane is another example of petroleum being used to meaningfully improve lives. According to the WHO, approximately three billion people still cook with solid fuels such as wood, crop wastes, and dung. These cooking fuels are detrimental to your health, with an estimated four million people dying prematurely each year from solid fuels.³ In India, approximately 78% of the population in 2015 used solid fuels, leading to an estimated half a million deaths a year, with women and young children the most vulnerable. In 2016 the Indian government launched Ujjwala, which provided both access and subsidies for propane. As a cooking fuel, it burns much cleaner and more efficiently than solid fuels. Since it was easily distributed in cannisters provided for free by the government, propane coverage has now reached approximately 90%, immediately improving the lives of hundreds of millions of people there. The Ujjwala program remains popular domestically. Today, India is amongst the largest propane importers, supplied in large part by US exports.

Figure 1: US LPG exports to India

Petroleum alternatives exist, but so do tradeoffs

Hypothetically, a “green” solution for replacing harmful solid fuels predicated on renewable power would have a smaller carbon footprint than propane, but practically, that would mean hundreds of millions of people would suffer for years, if not decades, waiting on solar and wind farms, transmission lines, and distribution infrastructure, nevermind being able to afford an electric stove. Instead, utilizing propane not only results in meaningfully better health outcomes for millions of people today, but also immediately improves the environment. If two billion people were to switch from wood to propane, carbon emission would be reduced by approximately 415 million tons annually – about the emissions from the United Kingdom – and deforestation would decline by approximately five million acres – equivalent to approximately 40% of annual global deforestation.⁴

Plastics, which are almost entirely derived from petroleum, have been essential in increasing energy efficiency, reducing food waste, and enhancing health and safety. Plastics are versatile, durable, cheap, and lightweight, and common applications include packaging (e.g., clamshell boxes, bubble wrap, protective film) and food-service storage and preservation (e.g., milk jugs, bread bags, yogurt containers). Though alternatives such as aluminum and glass do not utilize petroleum as a direct feedstock, the tradeoff of their (i) high heat requirements (provided mostly from coal and natural gas) during production and (ii) additional weight⁵, thus requiring greater energy for transport, renders their overall carbon footprint significantly greater than plastics.

Figure 2: Carbon footprint

Plastics are currently amongst the largest sources of petroleum demand and are expected to be the largest source of growth going forward, particularly in emerging markets. Consider, plastic consumption per capita in North America is 126kg, which is considerably higher than Latin America, Asia ex-China, and the Middle East and Africa which are all below 40kg and China which is less than 80kg. Besides plastic, petroleum is still an essential ingredient to the industrial economy – large-scale transportation modes (e.g., ships, rail, planes), steel mills, refineries, and petrochemical facilities are all powered by petroleum while alternative fuels have suboptimal and counterproductive energy density, distribution and availability, and reliability characteristics. “Improving living standards” is something to strive for but the term can be a vague target: more granularly, the benchmarks include sanitation, medical supplies, food security and safety, and commerce – all of which require petroleum to improve and make available.

Figure 3: Petroleum demand 2018-2035 by sector

Figure 4: Plastic consumption per capita

Despite the growing necessity of plastics, solutions are needed for waste and disposal. Plastics in oceans, rivers, and landfills are certainly a major problem today and left unabated, the environmental harm will offset gains in living standards. Founded last year, The Alliance to End Plastic Waste (AEPW) is a non-profit consisting of 50 companies across the supply chain focused on finding sustainable solutions. Although alternative materials are being sought, the focus today from consumer companies and the industry is on recycling. Two key focus areas are (i) making goods and packaging more recyclable and (ii) increasing the recycled content in products and packaging. Anecdotally in the US, we see an increasing amount of consumer goods and e-commerce packaging made from recycled content, and we expect this trend to grow quickly. Potential innovations such as chemical recycling – taking mixed plastics and converting them back to their original materials – would provide another solution alongside mechanical recycling, which exists today but faces sorting bottlenecks. Ultimately, the industry is incentivized to find solutions, and we expect sustained investment in recycling infrastructure and sustainable packaging in the near and long term.

Though near-term uncertainties exist, midstream valuations remain compelling

A common concern from investors in the oil and gas sector is about the uncertain secular trends facing the industry. In our view, these uncertainties are driven by headlines and rhetoric. Consider, (i) the large and globally expanding non-transportation derived demand for hydrocarbons discussed here, (ii) the impediments and realities to rapid power generation conversion (to be discussed in a later blog), and (iii) the very slow and only partial transportation-fuel transition (see our blog Will electric vehicles muffle future oil demand?) mean global demand for hydrocarbons is unlikely to significantly deteriorate for the foreseeable future.

Acknowledging the uncertainty in today’s global economy, fundamentals remain strong for US midstream. For example, Enterprise Product Partners LP (NYSE: EPD) generated a second quarter 2020 earnings-before-interest-taxes-depreciation-and-amortization (EBITDA) run-rate of nearly $8 billion during an unprecedented commodity price and volume environment. EPD can sustain the business with an annual capital spend of approximately $1 billion, meaning the company can fully self-fund capital expenditures and have billions leftover to return to unitholders and further de-lever its already strong balance sheet. This free cash flow compares favorably to EPD’s total enterprise value of $68 billion and 10% yield.⁶ The broader midstream space looks similarly attractive – according to Wells Fargo’s fiscal year 2021 metrics, the average MLP EBITDA multiple is 8.2x, yield is 11%, and distribution coverage is 2.1x.

As the broader stock market looks past the near-term COVID-19 uncertainty and reaches new all-time highs, midstream equities are priced as if today’s uncertainty is the new normal. As discussed in this blog, US petroleum production is a vital component in today’s global economy and necessary in maintaining and improving global living standards, and although much uncertainty exists over the next year, we firmly believe that these truths remain constructive for the US midstream space over the long-term. 

As of 6/30/2020, Enterprise Products Partners was a 12.24%, 0.00%, 4.96% and 12.57% weight in Invesco Oppenheimer SteelPath MLP Alpha, Invesco Oppenheimer SteelPath MLP Income, Invesco Oppenheimer SteelPath MLP Select 40 and Invesco Oppenheimer SteelPath MLP Alpha Plus Funds respectively. 

Footnotes

1. Defined as liquid hydrocarbon

2. Brookings Institute, Accelerating the low carbon transition, December 2019

3. World Health Organization, Household air pollution and health, May 2018

4. WLPGA, Substituting LPG for Wood: Carbon and Deforestation Impacts, July 2018

5. A 16-ounce bottle made of glass would weigh approximately 50 times more than one made of plastic

6. As of September 1, 2020

Important Information

Blog Header Image: VikramRaghuvanschi / Getty

Businesses in the energy sector may be adversely affected by foreign, federal or state regulations governing energy production, distribution and sale as well as supply-and-demand for energy resources. Short-term volatility in energy prices may cause share price fluctuations.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.

The mention of specific companies does not constitute a recommendation by Invesco Distributors, Inc. Certain Invesco funds may hold the securities of the companies mentioned. A list of the top 10 holdings of each fund can be found by visiting invesco.com.

Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

August brought relatively stable midstream equity prices despite continued upward momentum in commodity prices. Quarterly earnings season concluded, the first to include the impact of COVID-19 and the resulting impact on global demand for hydrocarbons. Results were, on average, better than Wall Street expected.

MLP market overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended August down 1.3% on a price basis but up 0.5% once distributions were considered. The AMZ results underperformed the S&P 500 Index’s 7.2% total return for the month. The best performing midstream subsector for August was the Other Energy subsector (with gasoline distribution businesses driving performance), while the Diversified subsector underperformed, on average.

For the year through August, the AMZ is down 42.7% on a price basis, resulting in a 37.8% total return loss. This compares to the S&P 500 Index’s 8.3% and 9.7% price and total returns, respectively. The Propane group has produced the best average total return year-to-date, while the Marine subsector has lagged.

MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, narrowed by two basis points (bps) over the month, exiting the period at 1,200 bps. This compares to the trailing five-year average spread of 653 bps and the average spread since 2000 of approximately 408 bps. The AMZ indicated distribution yield at month-end was 12.7%.

Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $4.0 billion of debt during the month. No new asset acquisitions were announced in August.

Spot West Texas Intermediate (WTI) crude oil exited the month at $42.61 per barrel, up 5.8% over the period and 22.7% lower year-over-year. Spot natural gas prices ended August at $2.30 per million British thermal units (MMbtu), up 31.4% over the month but 1.7% lower than August 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $20.03 per barrel, 6.7% higher than the end of July and 11.7% higher than the year-ago period.

News

Second Quarter Earnings Season Ends. Second quarter reporting season wrapped-up in August. Through month-end, 52 midstream entities had announced distributions for the quarter, including four increases, four reductions, and 44 unchanged from the previous quarter. Through the end of August, 56 sector participants had reported second quarter financial results. Operating performance was, on average, better than expected with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 2.3% higher than consensus estimates but 10.5% lower than the preceding quarter due to the production shut-ins associated with the significant and abrupt crude oil demand destruction due to a rapid expansion of COVID-19 containment efforts globally.

Delek Finally Eliminates IDRs. Delek US Holdings (NYSE: DK) and Delek Logistics Partners (NYSE: DKL) announced an agreement to eliminate all incentive distribution rights (IDRs) in exchange for 14 million newly issued DKL common limited partner units and $45 million in cash. Following the close of the transaction, DK will hold a non-economic GP interest in DKL and own approximately 34.7 million DKL common limited partner units, representing approximately 80% of DKL’s outstanding common limited partner units.

DAPL Wins Temporary Reprieve. In early August the Dakota Access Pipeline (DAPL) won a ruling from a three-judge panel at the U.S. Court of Appeals for the D.C. Circuit that sat aside a lower court’s ruling to empty the pipeline pending the development of an environmental impact statement (EIS). The lower court must now hear from the U.S. Army Corps of Engineers (ACE) regarding its plans to address the pipeline’s vacated easement. In late August the ACE notified the court that it plans to file a notice of intent to prepare an EIS by September 4, 2020 and is continuing to evaluate options related to the encroachment of the pipeline. The pipeline continues to operate.

Chart of the month: midstream valuations remain below Financial Crisis levels

With the significant pullback in midstream equity prices and only a modest recovery, midstream valuations remain at record lows, below levels experienced during the 2008 financial crisis. The Price to Forward Distributable Cash Flow Multiple (P/DCF) reflects the valuation of the stock price to the cash flows generated from the business, less maintenance capital. For a midstream company in steady state, the distributable cash flow (DCF) represents the cash generated from the business that is available to payout as a distribution. Therefore, the P/DCF multiple reflects the value the equity is trading at relative to the DCF generation of the underlying business.

Source: All data sourced from Bloomberg L.P. as of 8/31/2020 unless otherwise stated. 

As of 8/31/20 Invesco Oppenheimer SteelPath MLP Income Fund had 2.70% of its assets invested in Delek Logistics Partners and 0.00% assets in Delek US Holding.

Holdings are subject to change and are not buy/sell recommendations.

Important Information

Basis points are a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.

The opinions referenced above are those of the author as of September 2, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc.

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. Indices are unmanaged and cannot be purchased directly by investors.

Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. An investment cannot be made into an index. Past performance does not guarantee future results

A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level, calculated by deducting the yield of one instrument from the other. 

Most MLPs operate in the energy sector and are subject to the risks generally applicable to companies in that sector, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. MLPs are also subject the risk that regulatory or legislative changes could eliminate the tax benefits enjoyed by MLPs which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the portfolio’s investments. Although the characteristics of MLPs closely resemble a traditional limited partnership, a major difference is that MLPs may trade on a public exchange or in the over-the-counter market. Although this provides a certain amount of liquidity, MLP interests may be less liquid and subject to more abrupt or erratic price movements than conventional publicly traded securities. The risks of investing in an MLP are similar to those of investing in a partnership and include more flexible governance structures, which could result in less protection for investors than investments in a corporation. MLPs are generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.

September brought energy market volatility that carried over to midstream equity prices. During the month, midstream sector participants continued placing growth projects into place, while also finding creative ways to reduce capital expenditure requirements. Bond investors have taken notice, but equity valuations continued to lag likely due to lackluster fund flows.

MLP market overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended September down 13.6% on a price basis and once distributions are considered. The AMZ results underperformed the S&P 500 Index’s 3.8% total return loss for the month. The best performing midstream subsector for September was the Propane group, while the Gathering and Processing subsector underperformed, on average.

For the year through September, the AMZ is down 50.5% on a price basis, resulting in a 46.2% total return loss. This compares to the S&P 500 Index’s 4.1% and 5.6% price and total returns, respectively. The Propane group has produced the best average total return year-to-date, while the Gathering and Processing subsector has lagged.

MLP yield spreads, as measured by the AMZ yield relative to the 10-Year U.S. Treasury Bond, widened by 219 basis points (bps) over the month, exiting the period at 1,410 bps. This compares to the trailing five-year average spread of 665 bps and the average spread since 2000 of approximately 412 bps. The AMZ indicated distribution yield at month-end was 14.8%.

Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $3.0 billion of debt during the month. No new asset acquisitions were announced in September.

Spot West Texas Intermediate (WTI) crude oil exited the month at $40.22 per barrel, down 5.6% over the period and 25.6% lower year-over-year. Spot natural gas prices ended September at $1.63 per million British thermal units (MMbtu), down 29.1% over the month and 31.2% lower than September 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $19.02 per barrel, 5.0% lower than the end of August and 3.8% lower than the year-ago period.

News

EPD does more with the same. Enterprise Products Partners (NYSE: EPD) cancelled its plans for the Midland to ECHO 4 (M2E4) crude oil pipeline project, noting they will be able to meet existing customer commitments on M2E4 by moving those volumes to other EPD crude oil pipelines lines. The cancellation of M2E4 will reduce aggregate growth capital expenditures for 2020, 2021 and 2022 by approximately $800 million.

WES and OXY trade debt for equity. Western Midstream (NYSE: WES) announced the exchange of its interest in a $260.0 million, 6.5% fixed-rate receivable from its sponsor, Occidental Petroleum Corporation (NYSE: OXY), for 27.9 million WES common units owned by OXY. Following the completion of the exchange, WES cancelled the common units acquired.

ET Completes Lone Star Express Expansion. Energy Transfer (NYSE: ET) announced the completion of its Lone Star Express Pipeline expansion project, adding over 400,000 barrels per day of natural gas liquids (NGLs) capacity to Energy Transfer’s existing Lone Star NGL pipeline system in Texas. The new pipeline originates in west Texas and connects into the existing Lone Star Express pipeline south of Fort Worth and provides shippers additional connectivity out of the Permian and Delaware basins. The Lone Star pipeline system ultimately connects into Energy Transfer’s Mont Belvieu facility, an integrated liquids storage and fractionation facility along the U.S. Gulf Coast with strategic connectivity to over 35 petrochemical plants, refineries, fractionators and third-party pipelines. Energy Transfer’s seventh fractionator at Mont Belvieu was brought online earlier this year, bringing the partnership’s total fractionation capacity to more than 900,000 barrels per day.

Chart of the month: bond investors appear to view Midstream more positively than equity investors

Bond market investors appear to be expressing a more positive view on the midstream energy outlook than the equity markets. The chart of the month plots the midstream price-to-discretionary cash flow multiple (P/DCF), a comparison of the stock price to the cash flow generated from the business after reserving capital to maintain the assets in place, and the bond market yield spreads for midstream companies with ratings considered investment grade and those considered sub-investment grade or “high yield”.

At month-end, midstream equities were trading at approximately 3.8 times discretionary cash flow (DCF), a substantial (63%) discount to the long-term average multiple of approximately 10.5 times DCF. However, the yield spread between investment grade midstream bonds and the 10-year treasury bond is currently at approximately 250 basis points compared to the long-term average of approximately 203 basis points and near the normalized longer-term pricing bands.  The yield spread between high yield midstream bonds and the 10-year treasury bond was recently trading at approximately 586 basis points compared to the long-term average of approximately 400 basis points, outside the normalized longer-term pricing bands, but much less punitive than the equity price valuation dislocation seen via P/DCF and other commonly used valuation methods.

Highlighting this bond/equity valuation dislocation via proxy, in September NuStar Energy (NYSE: NS), a high-yield rated midstream partnership, issued $600 million of bonds due in 2025 at a 5.75% yield and $600 million of bonds due in 2030 at 6.375% while its equity units trade with a 15% yield and expected distribution coverage in 2021 of approximately 1.9x. Further, in August, MPLX, LP (NYSE: MPLX), an investment grade rated midstream partnership issued $1.5 billion of bonds due in 2026 with a yield of just 1.75% and $1.5 billion of bonds due in 2030 at a yield of 2.65%. MPLX’s equity units are currently trading with a distribution yield of approximately 17% and the partnership is expected to produce DCF in 2021 that covers its distribution by approximately 1.3x.

Holdings

As of 9/30/2020, Energy Transfer LP held a 13.91%, 13.79%, 12.47% and 4.98% weight in Invesco SteelPath MLP Alpha, Alpha Plus, Income and Select 40 Funds, respectively.

As of 9/30/2020, Enterprise Products Partners held a 13.58%, 13.53%, 0.00% and 5.06 % weight in Invesco SteelPath MLP Alpha, Alpha Plus, Income and Select 40 Funds, respectively.

As of 9/30/2020, MPLX LP held a 11.86%, 11.24%, 12.50% and 6.91% weight in Invesco SteelPath MLP Alpha, Alpha Plus, Income and Select 40 Funds, respectively.

As of 9/30/2020, NuStar Energy LP held a 0.00%, 0.00%, 3.82% and 4.30% weight in Invesco SteelPath MLP Alpha, Alpha Plus, Income and Select 40 Funds, respectively.

As of 9/30/2020, Western Midstream Partners LP held a 1.82%, 1.79%, 7.60% and 3.35% weight in Invesco SteelPath MLP Alpha, Alpha Plus, Income and Select 40 Funds, respectively.

No SteelPath mutual fund held Occidental Petroleum Corporation as of 9/30/2020.

Important Information

Source: All data sourced from Bloomberg as of 9/30/2020 unless otherwise stated. 

The opinions referenced above are those of the author as of October 2, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc.  A list of the top 10 holdings of each fund can be found by visiting invesco.com. 

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. Indices are unmanaged and cannot be purchased directly by investors.

Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. An investment cannot be made into an index. Past performance does not guarantee future results

A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level, calculated by deducting the yield of one instrument from the other. 

Most MLPs operate in the energy sector and are subject to the risks generally applicable to companies in that sector, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. MLPs are also subject the risk that regulatory or legislative changes could eliminate the tax benefits enjoyed by MLPs which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the portfolio’s investments. Although the characteristics of MLPs closely resemble a traditional limited partnership, a major difference is that MLPs may trade on a public exchange or in the over-the-counter market. Although this provides a certain amount of liquidity, MLP interests may be less liquid and subject to more abrupt or erratic price movements than conventional publicly traded securities. The risks of investing in an MLP are similar to those of investing in a partnership and include more flexible governance structures, which could result in less protection for investors than investments in a corporation. MLPs are generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.

Midstream equities outperformed the broader markets in October as third-quarter earnings season kicked off with better-than-expected results. Increasing midstream free cash flows are expected to bolster improve balance sheets in the years ahead as capital spending requirements have ebbed.

MLP market overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended October up 2.9% on a price basis and up 4.3% once distributions are considered. The AMZ outperformed the S&P 500 Index’s 2.7% total return loss for the month. The best performing midstream subsector for October was the Gathering and Processing group, while the Diversified subsector underperformed, on average.

For the year through October, the AMZ is down 48.7% on a price basis, resulting in a 43.5% total return loss. This compares to the S&P 500 Index’s 1.5% and 3.1% price and total returns, respectively. The Propane group has produced the best average total return year-to-date, while the Diversified subsector has lagged.

MLP yield spreads, as measured by the AMZ yield relative to the 10-year US Treasury bond, narrowed by 73 basis points (bps) over the month, exiting the period at 1,337 bps. This compares to the trailing five-year average spread of 678 bps and the average spread since 2000 of approximately 415 bps. The AMZ indicated distribution yield at month-end was 14.2%.

Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) or debt during the month. No new asset acquisitions were announced in October.

West Texas Intermediate (WTI) crude oil exited the month at $35.79 per barrel, down 11.0% over the period and 33.9% lower year-over-year. Natural gas prices ended October at $3.35 per million British thermal units (MMbtu), up 32.7% over the month and 27.4% higher than October 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $19.90 per barrel, 4.6% higher than the end of September and 9.6% lower than the year-ago period.

News

Energy Transfer making changes. Energy Transfer (ET) announced that Kelcy Warren will turn over the Chief Executive Officer position to long-time ET executives Mackie McCrea and Tom Long, effective Jan. 1, 2021. Warren will remain as Executive Chairman and Chairman of the Board of Directors. As Co-CEOs, McCrea and Long will work together in the manner of an “Office of the CEO” and will jointly direct the business of the Partnership. Warren will continue to be actively involved in the strategic direction of the Partnership. Later in the month ET elected to reduce its distribution by 50% and, likely, increase its focus on debt reduction. Standard and Poor’s immediately affirmed Energy Transfer’s investment grade rating (BBB-) and Moody’s affirmed its investment grade rating (Baa3) the following day.

Third-quarter earnings season commences. Third-quarter reporting season began in October. Through month-end, 47 midstream entities had announced distributions for the quarter, including four distribution increases, two reductions, and 41 distributions that were unchanged from the previous quarter. Through the end of October, 11 sector participants had reported third-quarter financial results. Operating performance has been, on average, better than expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 5.5% higher than consensus estimates and 9.9% higher than the preceding quarter.

TRP Proposes to Buy TCP. TC Energy (TRP CN) made a non-binding offer to acquire all outstanding common units of TC Pipelines (TCP) that it does not already own, with an exchange ratio of 0.65 common units of TRP for each unit of TCP, representing an implied value of $27.31/unit based on the Oct. 2 closing price of TRP, or a 7.5% premium to the 20-day weighted average price of TCP common units. A Conflicts Committee composed of independent directors of the TCP Board will be formed to consider the offer pursuant to its processes.

Chart of the month: rising free cash flow bolsters midstream balance sheets

As midstream cash flows have remained resilient, and as the industry continues to rationalize capital spending, estimates for sector free cash flow1 have significantly increased. Further, as market participants are no longer rewarding distribution growth, midstream energy sector participants are largely expected to hold distributions steady and let excess cash flow accrue to the balance sheet.

The chart below presents estimates from Wells Fargo for total free cash flow and distributions/dividends for the publicly traded US midstream companies through 2025. We believe the difference between each year’s free cash flow and the cash payouts to equity investors may be used to reduce borrowings and, to a lesser extent, buyback undervalued equity units.

Source: Wells Fargo as of 10/31/2020.Past performance does not guarantee future results. “E” represents estimates. No guarantee that estimates will come to pass. Free cash flow is defined as distributable cash flow less growth capital expenditures and acquisitions, where distributable cash flow represents cash flow generated by the company’s operations reduced by expenditures to maintain the assets.

Important Information

Image credit: Abstract Aerial Art / Getty

Source: All data sourced from Bloomberg as of 10/31/2020 unless otherwise stated.

1. Defined as distributable cash flow less growth capital expenditures and acquisitions, where distributable cash flow represents cash flow generated by the company’s operations reduced by expenditures to maintain the assets.

The opinions referenced above are those of the author as of Nov. 2, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Midstream operators and companies are engaged in the transportation, storage, processing, refining, marketing, exploration, and production of natural gas, natural gas liquids, crude oil, refined products or other hydrocarbons.

The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc. A list of the top 10 holdings of each fund can be found by visiting invesco.com.

As of 9/30/2020, Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 13.91%, 12.47%, 4.98% and 13.79%, respectively in Energy Transfer LP.

As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 10.15%, 0.00%, 4.59% and 9.97%, respectively in TC Pipelines LP.

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. Indices are unmanaged and cannot be purchased directly by investors.

Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. An investment cannot be made into an index. Past performance does not guarantee future results

A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level, calculated by deducting the yield of one instrument from the other. 

Most MLPs operate in the energy sector and are subject to the risks generally applicable to companies in that sector, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. MLPs are also subject the risk that regulatory or legislative changes could eliminate the tax benefits enjoyed by MLPs which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the portfolio’s investments. Although the characteristics of MLPs closely resemble a traditional limited partnership, a major difference is that MLPs may trade on a public exchange or in the over-the-counter market. Although this provides a certain amount of liquidity, MLP interests may be less liquid and subject to more abrupt or erratic price movements than conventional publicly traded securities. The risks of investing in an MLP are similar to those of investing in a partnership and include more flexible governance structures, which could result in less protection for investors than investments in a corporation. MLPs are generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.

Lost in election season and pandemic news flow has been the relative stabilization in energy macro and midstream fundamentals since March. At the same time, midstream operators have aggressively cut costs and drastically reduced capital expenditure plans. As a result, many midstream companies are expected to generate substantial free cash flow over the coming quarters and years that can be deployed to further reduce balance sheet debt or be returned to equity investors through buybacks or distributions.

Despite the confluence of these factors, midstream equities, though well off their lows, are still trading at historically depressed levels. This weak equity performance is likely a result of the general level of investor anxiety surrounding the impact of COVID-19 containment efforts on economic activity and the uncertain timeframe for a return to normal economic activity. However, adding to COVID-19 related anxiety in our view is an increase in concern that rapid adoption of electric vehicles (EVs) and renewable energy may severely impact future midstream earnings.

Unfortunately, we cannot provide any unique insight into the timing of post-COVID-19 economic normalization. However, within this blog, we provide some perspective on the potential impact of decarbonization efforts and suggest current valuation levels appear to already and materially over this risk.

Macro Update

Since the depths of the global economic retraction associated with COVID-19 containment efforts, we believe economic activity and energy fundamentals have exhibited steady improvement towards normalization. For example,

• Road travel trends have reached or exceeded pre-pandemic levels across much of the globe.¹
• Though US gasoline demand is 9% below pre-pandemic levels, the 42% decrease experienced in April proved much shorter lived than feared at the time.²
• While airline travel remains depressed, truck loading data has rebounded to above pre-pandemic levels helping to increase the demand for diesel.²
• Deliveries of natural gas to US LNG export facilities, as well as LPG and ethane exports, have returned to pre-pandemic levels.^{3, 4}

As a result,

• Crude oil pricing has traded at $35 per barrel or higher since June. While most producers may not pursue production growth until pricing recovers further, we believe most may seek to maintain current volumes.⁵
• Natural gas pricing has rallied well past pre-pandemic levels to near $3.00 per mcf. Notably, the majority of midstream assets serve natural gas production.⁶

As a result of these trends, well shut-ins that occurred earlier in the summer in reaction to the extreme price shock across energy commodities have now largely been reversed. The domestic rig count appears to have reached a bottom and well completion activity has been improving (completing a drilled well allows the well to produce and is more indicative of production trends). 

All of these factors suggest that midstream operating performance should also be rebounding. And, in fact, early third quarter operating results are confirming this trend. Further, this firming of operating performance is occurring while operators are instituting significant cost and capital spending plan reductions. As a result, over the coming quarters we expect midstream operators to potentially generate significantly higher free cash flow available for debt reduction or to return to equity holders through buybacks or distributions as seen in Exhibit 1 below.  In total, Wells Fargo estimates MLPs to generate in excess of $30.0 billion in free cash flow after distributions from 2021 through 2025.⁵

Decarbonization

While we do not doubt that the political will to pursue decarbonization is real and that progress will surely be made, we believe justifying today’s valuations on this premise of broad and rapid hydrocarbon substitution is misplaced.

First, let’s consider the macro trends at work. Energy demand, according to most prognosticators, will continue to grow briskly as the billions of people that live in non-developed and developing economies continue to strive to improve their standard of living. While decarbonization efforts within developed economies are likely to result in muted growth or shrinking hydrocarbon demand regionally, global hydrocarbon demand is likely to continue to grow.  Similar to the Energy Information Administration’s (EIA) forecast, a recent UBS report projects energy demand in 2050 will increase 45% from 2018 levels (see Exhibit 2 below.)  Meeting this demand will most likely require both significant traditional and renewable energy expansion.

Therefore, while renewable energy development is sure to accelerate, demand for traditional fuels is likely to continue to grow for some time as well. Consider that only certain locations on the planet provide for efficient wind and solar placement (consistent wind or sunshine) and developing these solar or wind turbine assets as well as the infrastructure to support broad transmission, distribution, and storage of generated power represents massive, long lead-time investment. However, we believe populations will continue to seek quality-of-life improvements that result from access to cheap energy nonetheless. Hydrocarbons such as natural gas and propane are growing rapidly in emerging economies today precisely because they are both immediately actionable and practical – they improve quality of life and the environment and do so very cost-effectively.⁷ 

Secondly, developed nations, even where wind and solar are well suited, may face a very complex and costly path to significant hydrocarbon substitution.  Though these challenges receive little attention, gauging the potential pace at which traditional energy demand in developed countries may decline requires an examination of these challenges.

We encourage readers to review our previous blog, “Unpopular but essential – petroleum products improve lives in unappreciated ways”.  Within we provide greater detail of the incredibly broad range of products which depend on petroleum products as a feedstock and for which alternatives are few and typically much more energy intensive.

Further, even substitution within transportation through electric vehicles presents significant challenges as it simply results in a shift from internal engine power to electric grid power demand. This additional call on electric power is likely to veer towards evening when solar derived power is unavailable and evening wind resource is only reasonably consistent in a few geographies. Therefore, meaningful growth in electric vehicle adoption would stress traditional generating capacity as well as current electric grid design and capacity. Solving both would require massive and long-lead time investment.

Even before additional load requirements associated with EV growth emerge, in our view, simply replacing coal and natural gas with renewables at current load levels would also require massive investment. First, additional wind and solar, where practicable, would be required on an enormous scale. Further, areas that can utilize wind and solar are expected to require enormous new energy storage solutions to provide grid stability particularly for nighttime power consumption and for periods when the weather is simply poor proving for limited light or wind. Notably, the scale of energy storage required to accommodate renewable intermittency and to provide grid reliability is often overlooked but appears difficult to solve barring significant new technological breakthroughs. Consider that today’s total annual global lithium battery production would only be able to store approximately seven minutes of global electricity usage.⁷

To be clear, we are not advocating against decarbonization efforts. In fact, given the growth in global energy demand discussed above and the significant reduction in oil and gas development outside of the US since 2016, we believe material growth in renewables will be needed. However, we do believe this transition may be much slower, more complex, expensive, and labored than may be commonly recognized.

Putting Today’s Valuations In Context

Given the push and pulls listed above it is obviously impossible to forecast hydrocarbon demand decades out. However, we do have confidence that however these competing influences unfold, the impact on hydrocarbon demand can evolve necessarily very slowly and over many decades.

Further, global oil and gas investment has fallen from approximately $750 billion per year pre-2016 to a range of $400 billion to $480 billion per year since and spending in 2020 and 2021 is likely headed even lower.⁽⁵⁾ It is certainly possible that as decline rates in legacy global oil fields slowly overwhelms this muted level of investment, the call on efficient US shale production could actually increase even if aggregate global demand falters in the future.

Therefore, if energy transition anxiety is contributing to today’s depressed midstream equity valuations, we are hopeful that over time the market may begin to more rationally assess this risk. For example, Wells Fargo recently published a report on terminal value highlighting that “Based on our analysis, we do not see any realistic renewables scenarios that would materially impact oil and gas demand within the next 10 years. In contrast, investors are assuming free cash flow for these companies to fall to zero (and/or 100% goes towards servicing debt) starting in 2030.”⁸ 

Wells Fargo analysts also estimate that for many MLPs, investors are ascribing zero or minimal terminal value after 10 years.  This analysis bears repeating, according to Wells Fargo’s analysis, today’s midstream equity values imply that investors are assuming there is no equity value in these companies after 10 years.

To use a specific example, consider Enterprise Products Partners (NYSE: EPD). EPD currently yields in excess of 10% and generates a free cash flow yield of greater than 15%.  Taking into account its free cash flow, Wells Fargo estimates there are 13 years of free cash flow discounted in the current EPD unit price.  In effect, investors are not paying for any free cash flow generated by EPD after 13 years.⁸ 

Closing thoughts

We believe the extreme, relatively near-term impact to midstream operations implied by today’s valuations is outside even the most aggressive renewables or decarbonization projections we have reviewed; even those that give little notice to the significant real world challenges that such a transition will have to overcome  If midstream equities are trading with minimal terminal value after 2030 based on energy transition anxiety then we believe midstream equities may benefit as more rational analysis around this issue emerges.

Further, at whatever pace energy transition occurs, it is clear the investment required could be enormous reaching into the many trillions. Just as today’s oil and gas majors are amongst the globe’s largest investors in wind and solar, there is no reason US midstream operators would not invest in new logistics assets related to renewables over the coming decades as well.  In fact, it is almost impossible to envision that these companies with hard asset management expertise and growing free cash flows would sit idly by while trillions in attractive investment opportunities are pursued by others.  For instance, one of the most apparent opportunities is hydrogen transportation and storage which is very similar to natural gas transportation and storage that many MLPs are involved in today.

We believe that over time these miscalculations will become more and more apparent to market participants and, hopefully, allow the sector to return to more normal trading ranges.

1. Bernstein Desk Color: Energy: Oct. 19, 2020

2. Morgan Stanley, High Frequency Indicators: Oct. 23, 2020

3. Bloomberg Energy Net Daily Deliveries to US LNG Terminals

4. Bloomberg Energy U.S. Waterborne LPG and Ethane Exports

5. Wells Fargo, Midstream Monthly Outlook: October 2020.

6. Bloomberg as of 10/31/2020.

7. Cornerstone Macro: Battery Scalability Bottlenecks and Energy Density Shortcomings: November 25, 2019.

8. Wells Fargo, Midstream: Quantifying Terminal Value in An Energy Transition: October 26, 2020

Midstream operators and companies are engaged in the transportation, storage, processing, refining, marketing, exploration, and production of natural gas, natural gas liquids, crude oil, refined products or other hydrocarbons.

Important information

Blog header image: Dave Carr / Getty

As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 13.58%, 0.00%, 5.06% and 13.53%, respectively in Enterprise Products Partners LP. 

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.

The opinions referenced above are those of the author as of November 4, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

The mention of specific companies, industries, sectors or issuers does not constitute a recommendation by Invesco Distributors, Inc. Certain Invesco funds may hold the securities of the companies mentioned. A list of the top 10 holdings of each fund can be found by visiting invesco.com.

Businesses in the energy sector may be adversely affected by foreign, federal or state regulations governing energy production, distribution and sale as well as supply-and-demand for energy resources. Short-term volatility in energy prices may cause share price fluctuations.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Each fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. Diversification does not guarantee profit or protect against loss.

The opinions expressed are those of Invesco SteelPath are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Midstream equities outperformed the broader markets in November as third-quarter earnings season demonstrated better-than-expected sector results and as demand sentiment was bolstered by encouraging vaccine results. LNG exports have recovered are now setting new record levels not seen since 2018.

MLP market overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ), ended November up 21.7% on a price basis and up 23.8% once distributions are considered. The AMZ outperformed the S&P 500 Index’s 10.9% total return for the month. The best performing midstream subsector for November was the Gathering and Processing group, while the Propane subsector underperformed, on average.

For the year through November, the AMZ is down 38.0% on a price basis, resulting in a 30.6% total return loss. This compares to the S&P 500 Index’s 12.1% and 14.0% price and total returns, respectively. The Propane group has produced the best average total return year-to-date, while the Diversified subsector has lagged.

MLP yield spreads, as measured by the AMZ yield relative to the 10-year US Treasury bond, narrowed by 278 basis points (bps) over the month, exiting the period at 1,058 bps. This compares to the trailing five-year average spread of 687 bps and the average spread since 2000 of approximately 418 bps. The AMZ indicated distribution yield at month-end was 11.4%.

Midstream MLPs and affiliates raised no new marketed equity (common or preferred, excluding at-the-market programs) and $1.4 billion of debt during the month. No new asset acquisitions were announced in November.

West Texas Intermediate (WTI) crude oil exited the month at $45.34 per barrel, up 26.7% over the period and 17.8% lower year-over-year. Natural gas prices ended November at $2.88 per million British thermal units (MMbtu), down 14.1% over the month but 26.3% higher than November 2019. Natural gas liquids (NGL) pricing at Mont Belvieu exited the month at $21.60 per barrel, 8.5% higher than the end of October and 9.4% lower than the year-ago period.

News

Third-quarter earnings season winds down. Third-quarter reporting season wrapped up during November. Through month-end, 52 midstream entities had announced distributions for the quarter, including four distribution increases, four reductions, and 44 distributions that were unchanged from the previous quarter. Through the end of November, 56 sector participants had reported third-quarter financial results. Operating performance has been, on average, better than expectations with EBITDA (or earnings before interest, taxes, depreciation and amortization) coming in 6.1% higher than consensus estimates and 9.4% higher than the preceding quarter.

More meaningful equity buybacks² announced. Several substantial unit/share buyback programs were announced in November. MPLX, LP (NYSE: MPLX) announced the largest overall program at $1 billion, while Plains All American Pipeline (NYSE: PAA) announced a $500 million program, Western Midstream (NYSE: WES) announced a $250 million buyback, and EnLink Midstream (NYSE: ENLC) and Rattler Midstream (NYSE: RTLR) each announced $100 million buyback authorizations.

New addition to the public midstream universe expected in 2021. DTE Energy (NYSE: DTE) recently announced its intention to spin-off its midstream segment into its own public entity next year. The segment includes natural gas pipeline, storage, and gathering businesses located predominately in the northeastern US that are expected to generate approximately $700 million of EBITDA during 2020.

Chart of the month: US LNG hits new record

Feedgas for facilities that cool natural gas to liquid form hit a new high of over 11 billion cubic feet per day entering December, staging a meaningful recovery from virus-related lows in August. Volumes are expected to remain robust through the winter but are likely to be influenced by regional weather patterns.³

Liquefied natural gas (LNG) requires considerably less storage volume and thus allows natural gas to be transported via ship to regions with inadequate reserves or limited access to long-distance transmission pipelines to meet their natural gas demand. Midstream sector participants in the United States facilitate LNG exports via all meaningful logistical efforts along the supply chain including gathering, transportation, storage, liquefaction, loading, and shipping.

Important Information

Blog header image: Raymond Forbes LLC / Stocksy

Source: All data sourced from Bloomberg as of 11/30/2020 unless otherwise stated. 

1. Defined as distributable cash flow less growth capital expenditures and acquisitions, where distributable cash flow represents cash flow generated by the company’s operations reduced by expenditures to maintain the assets.
2. Share repurchase is the re-acquisition by a company of its own shares.
3. S&P Global Platts, Gas Daily Market Fundamentals Data, Dec. 1, 2020

The opinions referenced above are those of the author as of Dec. 1, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Midstream companies are engaged in the transportation, storage, processing, refining, marketing, exploration, and production of natural gas, natural gas liquids, crude oil, refined products or other hydrocarbons.

The mention of specific companies, industries, sectors, or issuers does not constitute a recommendation by Invesco Distributors, Inc.  A list of the top 10 holdings of each fund can be found by visiting invesco.com. 

As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 11.86%, 12.50%, 6.91% and 11.24%, respectively in MPLX LP. 

As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 4.71%, 0.00%, 0.26% and 4.44%, respectively in Plains All American Pipeline LP. 

As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 1.82%, 7.60%, 3.35% and 1.79%, respectively in Western Midstream Partners LP. 

As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 0.00%, 4.83%, 0.00% and 0.00%, respectively in EnLink Midstream LP. 

As of 9/30/2020 Invesco SteelPath MLP Alpha Fund, Invesco SteelPath MLP Income Fund, Invesco SteelPath MLP Select 40 Fund and Invesco SteelPath MLP Alpha Plus Fund held 0.00%, 0.00%, 0.00% and 0.00% respectively in Rattler Midstream LP and DTE Energy. 

The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. Indices are unmanaged and cannot be purchased directly by investors.

Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. An investment cannot be made into an index. Past performance does not guarantee future results

A yield spread is the difference between yields on differing debt instruments of varying maturities, credit ratings, issuer, or risk level, calculated by deducting the yield of one instrument from the other. 

A basis point is one hundredth of a percentage point.

Most MLPs operate in the energy sector and are subject to the risks generally applicable to companies in that sector, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk. MLPs are also subject the risk that regulatory or legislative changes could eliminate the tax benefits enjoyed by MLPs which could have a negative impact on the after-tax income available for distribution by the MLPs and/or the value of the portfolio’s investments. Although the characteristics of MLPs closely resemble a traditional limited partnership, a major difference is that MLPs may trade on a public exchange or in the over-the-counter market. Although this provides a certain amount of liquidity, MLP interests may be less liquid and subject to more abrupt or erratic price movements than conventional publicly traded securities. The risks of investing in an MLP are similar to those of investing in a partnership and include more flexible governance structures, which could result in less protection for investors than investments in a corporation. MLPs are generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

The opinions expressed are those of Invesco SteelPath, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.