Master Limited Partnerships (“MLPs”) returned -1.28% during the month compared to +1.03% for the S&P 500. However,
the AMZ outperformed the E&P and OFS indices by 5.8% and 10.8%, respectively1. Crude oil volatility continues to be a headwind for MLP performance despite the correlation between the AMZ and crude prices decreasing month-over- month. Even as crude oil volatility weighed on equity performance, midstream companies continued to announce new organic projects and access the capital markets.
Crude Oil Volatility Dampens Sentiment
Crude oil price volatility, driven by over-supply concerns and geopolitical instability, has likely dampened investor appetite for energy securities. The over-supply concerns have come back recently in conversations with industry professionals and investors, fueled by producer commentary of a large domestic production ramp in oil and gas in the second half of 2017. The ramp in rig activity in the lower 48 has been extraordinary with YTD crude rigs +30% and gas rigs +23%. Only time will tell when this new production will come online, but it is evident that producers and service providers are on more solid footing and able to produce at lower prices because of cost reductions, active hedging, and cleaner balance sheets. Offsetting the increase in rigs was the start of inventory draw season with 4 consecutive weeks of inventory draws. Actual crude oil inventory draws in aggregate for April were in-line with consensus estimates, but there were some slight beats/misses on a weekly basis. We expect inventory draws through the end of driving season may help alleviate some of the over-supply concerns.
The monthly correlation between the AMZ and WTI spot prices decreased ~50% month-over-month to 0.34. This large decrease in the correlation is likely a function of yield-hungry investors stepping in and buying select MLPs before ex- dates. The YTD correlation now stands at 0.56.
Organic Capex Backlog Keeps Growing
April saw another slug of organic projects being announced, mostly in the premier domestic basins. The amount and pace of new projects announced this year has been remarkable and it is unlikely to end any time soon. There is still a lot to be done from an infrastructure perspective to get hydrocarbons from supply-rich areas to demand centers. In April alone there were 4 different takeaway pipeline projects announced out of the Permian into more premium pricing hubs. While we do not think every project will ultimately be built, it is encouraging to see market appetite for new takeaway capacity increase.
Capital Markets Reminiscent of 2014
April saw three equity deals price and the launch of an IPO (initial public offering). NS priced a ~$600mm common unit offering and a $350mm preferred offering to finance the concurrently announced Navigator acquisition. The deal received plenty of attention from the dedicated community helping it to trade very well in the aftermarket. The real excitement came with 2 midstream IPOs coming to market. The first, Hess Midstream Partners LP (NYSE: HESM), launched in late March and priced above the range in early April. HESM has performed very well since its IPO and has remained above deal price in a rather choppy market. Contrary to recent trends, Antero Midstream Partners LP’s (NYSE: AM) general partner, Antero Resources Midstream Management LLC (NYSE: AMGP), launched its unexpected IPO on 4/24/17 and subsequently priced on 5/3/17. It will be interesting to see how AMGP trades in the aftermarket given investor concerns on valuation and GP appetite. We continue to see midstream companies come to the debt and equity markets to finance organic and acquisition capex backlogs. We are comfortable that the market is open for high quality midstream companies, such as those in the Center Coast portfolio, and expect more deal activity through the end of the year.
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