Master Limited Partnerships (“MLPs”) returned 0.42% during the month compared to 1.90% for the S&P 500. Energy names were not able to continue their “Trump rally” despite some positive news from project approvals and preliminary OPEC data. However, MLPs managed to outperform the E&P and OFS indices by ~6%.
Trump Administrations Pushes Projects Across the Goal Line
President Trump has been extremely outspoken about making it easier to build new pipelines in the US by helping to alleviate some of the regulatory and environmental headwinds that had been encountered in the past couple of years. During February some of the most talked about projects were finally given the green light to proceed with construction. The afternoon of February 7th, the Army Corps of Engineers announced in a court filing that it would finally grant an easement for the Dakota Access Pipeline (“DAPL”), which should be the final regulatory hurdle for the project after months of delays / political headwinds. The DAPL announcement followed the FERC approval of 3 important Northeast pipeline projects, Northern Access, Rover and Atlantic Sunrise. These projects are positive news for the energy landscape in general because they will allow producers to receive better netbacks. There are still some projects in the backlog seeking regulatory approval, but the recent approvals certainly set a good precedent going forward.
Domestic Production at Odds with OPEC Cuts
Perhaps the main takeaway from this past earnings season is that E&P producers are willing to ramp up drilling and completions at current market prices. Announced capital expenditures for 2017 are 8% higher than what analysts expected, according to Wells Fargo. This increase in spending translates to a 53% increase over 2016 levels, indicating that E&P producers are now increasingly more comfortable with current market dynamics and forecasts to drill and complete wells. According to Simmons & Company the increase in capex spend could increase US production by 1 million barrels per day (MMbpd) by 2018. Entering 2017 that estimate was closer to 0.7 MMbpd by 2019. The increase in domestic crude production is at odds with what is going on in other parts of the world.
OPEC countries and several other Non-OPEC countries pledged to remove almost 1.8 MMbpd from the market beginning last month. To date, they have met 1.5 MMbpd of the goal. This, of course, was an effort to support depressed crude prices and alleviate socio-economic pressure within these countries. The progress of the cut so far has been very encouraging for the energy landscape and has placed a floor on crude prices, which remained range bound during February. There is no telling what will happen as these 2 forces collide, but the current backdrop certainly feels more constructive and cooperative than over the last couple of years.
What did Commodities do During February?
As noted above, crude prices remained range bound for all of February. Crude prices began the month at $53.88 per barrel and stayed within a dollar the whole month ending at $54.01. In short, crude prices traded sideways. This helped decrease the AMZ – crude correlation slightly month over month, from 0.54 to 0.50. However, natural gas stepped back into the spotlight posting a 19.3% price drop. Gas prices traded down on the month on actual and forecasted mild weather pushing Lower 48 gas inventories 7.1% above the five-year average. Even though natural gas play an equally important, if not more, role than crude prices in Midstream world the correlation between the AMZ and natural gas prices is negative (-0.10).
Midstream Earnings Remain Strong
February saw most of the MLP/midstream universe report their Q4 2016 earnings results and 2017 guidance. In general, earnings turned out to be non-events, with securities trading more on 2017 guidance and earnings call commentary. For Q4 2016 ~60% of the SMA’s constituents beat or met consensus expectations. When companies issued 2017 guidance it was mostly in-line with consensus expectations, and many noted that 2017 growth would be back-end weighted. This is due to the delay between when producers spend the capex capital and cash flow/production actually shows up on the asset (“negative carry”).
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