Master Limited Partnerships (“MLPs”) returned 1.29% during the month compared to +2.06% for the S&P 500. July was a breath of fresh air as not only was it the first positive total return month for the AMZ since February, but the correlation to crude prices retreated back to more normalized levels.
Crude Correlation Takes A Back Seat… For Now
Crude oil reversed its slide last month and closed the month above $50.00, a level last reach in late May. Crude draws surprised market participants by a wide margin during the first three weeks of the month; cumulative DOE crude stock draws came in 10.5 million barrels ahead of Bloomberg estimates. Crude prices reacted positively to the DOE announcements as the “crude glut” continues to get worked off. Domestic crude stocks are now 17.7% above the 5-year historical average, a vast improvement from the 30% - 40% levels seen in the first half of 2016 and 2017. The supply-demand equilibrium that we have been waiting for appears more attainable today.
While we generally welcome the decreased correlation between crude prices and the AMZ, we note that this break occurred in an up month for crude. The correlation for the month was 0.49, a 35% decrease month over month. However, this weakened correlation occurred in a month where crude prices were up 9% and broke the psychological $50.00 barrier. As mentioned in the previous monthly update, correlations tend to increase during time periods of negative performance. We will continue to monitor the correlation, but we remain confident that increasing domestic production volumes will outweigh crude price movements in the long run with regard to midstream/MLP performance. The seasonal draws we experienced in July came despite US production once again nearing all-time highs, a testament to resilient petroleum demand and decreasing imports as OPEC cuts continue to make their way through the global system.
Good and Bad News on the Regulatory Front
During the last couple of months there have been some developments, both good and bad, that have impacted the construction and development of new pipeline projects. Good news first; four much-anticipated and needed gas pipeline projects transporting gas from supply-rich basins in the Northeast recently attained their environmental impact statement (“EIS”) from the FERC. The granting of an EIS is an important milestone for a pipeline project as it gives the green light from an environmental perspective, a hot topic in today’s political arena. However, more regulatory hurdles remain for these projects (more information below). On the other hand, the Rover Pipeline, another Northeast pipeline project, continues to face scrutiny due to certain environmental violations which have come to light recently. Despite the negative news, Energy Transfer Partners LP (NYSE: ETP), the operator of the Rover Pipeline, has taken proactive steps to alleviate the situation. We continue to be optimistic about the current regulatory backdrop and will continue to monitor the environment for newbuild pipelines.
Though it did not occur during July it is important to point out that in early August the US Senate confirmed two appointees to the FERC, a step that finally ensures a quorum for the first time since early February. This is a pivotal development for several pipeline projects that have already received their EIS and are awaiting final FERC certificates before checking all the regulatory boxes. All of these projects have experienced some degree of regulatory delays which can be attributed to the lack of a FERC quorum. It is unclear how quickly the FERC will issue FERC certificates as the new commissioners are entitled to take the appropriate time before making a final ruling. However, it is a step in the right direction and an overall positive for the space.
Distributions and Earnings Tracking Well
Once more we find ourselves in the middle of distribution announcements with a couple of earnings announcements starting to trickle in. Distributions for Q2’17 have been mostly in-line with our internal projections. The Fund’s holdings increased distributions by 1.7% quarter over quarter and 2.1% year over year on a weighted average basis. As of the end of the month we have had 4 holdings report earnings, with 50% of them beating consensus expectations. The rest of the holdings report earnings in early August.
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