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Industry Overview- November 2017

Master Limited Partnerships (“MLPs”) returned -1.35% during the month of November compared to +3.07% for the S&P

500. November was another difficult month for MLPs despite earnings coming in better than expected and crude oil tailwinds. The AMZ reached a 2017 low of 252 on 11/29/17 (a level last seen during late February 2016) before making up serious ground the last trading day of the month. The AMZ staged a much-needed rally on 11/30/17 ending the day +4.1%, in the top 1.0% for daily performance in AMZ history.

Capital Markets and Technical Factors Weigh on Performance

We have talked at length about the effect that common equity issuances have had on sector performance throughout the downturn. Preferred unit issuances have emerged as a viable option for many MLPs/midstream companies looking to raise capital at attractive rates in order to fund growth projects. It is comforting to see a new pocket of capital appear for companies in our universe given that most are reluctant to issue common equity at depressed valuations. To the extent that there is ownership overlap between the holders of the common units and the newly issued preferred units we might expect alternative financing to act as a slight headwind for the space as investors must sell common units to make room for the preferreds. During November six preferred deals were priced raising total proceeds of $3.4 billion, a positive sign for companies looking to finance growth.

Tax loss harvesting, both by individuals and dedicated funds, acted as yet another challenge for the space during November. The tax loss selling trend is something we have seen a few times during this time of year, particularly in the absence of widespread losses in other market sectors. It is hard to pinpoint and/or quantify the exact effect of tax loss selling given its opaque nature; however, from chatter with other market participants it is a widely known fact that MLPs/midstream were an easy target this year.

Q3 2017 Earnings Stronger Than Expected

Q3 2017 earnings surprised to the upside as Gulf Coast hurricane impacts were less impactful than originally feared and volumes in key growth areas continued to ramp. 83% of the Focus Fund holdings beat or met consensus expectations on a weighted average basis. The four holdings that missed consensus expectations maintained full year 2017 guidance, highlighting the one-time and/or transient nature of the misses. As a whole, management commentary during earnings calls appeared to be bullish as domestic production continues to ramp, new projects come online, global commodity markets improve, domestic exports rise to record levels, and OPEC extends production cuts.

Crude Markets Continue to Improve and Further Bolstered by OPEC

Brent (+3%) and WTI (+6%) crude both performed well during November driven by depleting storage levels and OPEC’s production cut extension. Despite early rumors of Russia potentially dropping out of the OPEC production cut agreement in March 2018, OPEC and its Non-OPEC partners managed their alliance and extended the 1.8 million barrel per day production cut for all of 2018. Moreover, OPEC exceeded expectations by convincing Libya and Nigeria to agree to cap their production at 2017 levels. OPEC’s strong messaging provided a nice boost of confidence as some investors were worried that the OPEC meeting would be a disappointment given high expectations going into it. OPEC remains focused on tightening global inventories through its production cut before relying solely on crude oil demand growth to keep the crude market balanced.

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