Master Limited Partnerships (“MLPs”) returned -1.30% during the month compared to 0.12% for the S&P 500. Energy had a tough March driven by declining crude prices and negative headlines coming out of OPEC, which drove most of the AMZ performance. However, companies were able to announce new organic projects, execute on previously announced projects, and raise capital – all very positive signs.
Crude Prices Come Back to Center Stage
During the first two months of 2017 we experienced little crude oil volatility as OPEC executed on its previously announced production cuts and domestic producers slowly started adding rigs. Crude prices remained range-bound for most of the first two months in the $50-55 / barrel range, never closing below the $50 mark.
That changed this month as domestic inventories in the US increased more than expected and OPEC remained silent on further extending its production cuts. On March 8th, the DOE announced an 8.2 million barrels (“MMbbls”) weekly build in crude stockpiles versus expectations for only a 2 MMbbls build; this was the 9th straight week of domestic inventory builds and took inventories to a record high of 528 MMbbls. The DOE data drove crude prices down ~5.0% that day and brought back over-supply concerns. The following day, March 9th, Reuters said senior Saudi officials told top US oil firms in a closed-door meeting that they should not assume OPEC would extend output cuts to offset rising US shale production. This exacerbated the previous day’s sell-off with crude prices closing at $48.49, a 10% decline since the start of the month.
The following week OPEC and Non-OPEC countries became more bullish on extending the production cuts, which helped crude oil prices stabilize and remain at the $48.00 level. On March 26th a joint committee of ministers from OPEC and Non- OPEC producers released a draft statement that the committee “reports a high level of conformity and recommends a 6- months extension,” essentially extending the cut through year-end. Crude prices rallied on the positive commentary from OPEC managing to end the month back above $50. The volatility in crude prices drove most of the AMZ performance this month with the correlation back to 0.67. If crude prices remain range bound after OPEC’s willingness to extend cuts through the end of 2017 we would expect for this correlation to moderate to normalized levels (~0.4).
Organic Projects Make a Comeback
March had several of interesting organic project announcements, mainly focused on developing Permian oil and gas takeaway solutions. Capitalizing on producer (and investor) demand for more oil pipeline takeaway solutions out of the Permian, EPIC Pipeline announced a 730-mile line to carry output from the Delaware and Midland basins to a terminal in Corpus Christi. EPIC is sponsored by Castleton Commodities, TexStar Midstream, and Ironwood Midstream. Towards the later part of the month Buckeye Partners, L.P. (NYSE: BPL) announced a similar project, the South Texas Gateway Pipeline. The proposed pipeline is a 24-inch 400 thousand barrel per day crude oil pipeline from the Permian Basin to Corpus Christi, TX. These projects are two of several that were announced during March which suggests additional infrastructure is still needed to help “re-plumb” the lower 48. We expect more organic projects to be announced throughout the year as midstream operators continue to seek to capitalize on opportunities created by increasing domestic production.
Capital Markets Feel More like 2014 than 2016
Capital markets were also surprisingly busy. The main deal was the IPO launch for Hess Midstream Partners LP, an MLP formed by Hess Corporation to own and develop midstream infrastructure in the Bakken. The IPO received plenty of interest form the midstream dedicated community leading to the offering being upsized and pricing above the filing range1. Also, the GP of Antero Midstream Partners LP (NYSE: AM) filed an S-1 for an upcoming IPO. This was surprising since it is the opposite of the recent GP-LP trend (the simplification / collapse of the GP structure). There were several other equity and debt deals executed at very favorable pricing – a very positive sign for the space and the MLP business model going forward.
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