MLP Monthly Report: August 2022

The August MLP Monthly Report can be found here offering insights on MLP industry news, the asset class’s performance, yields, valuations, and fundamental drivers.

The latest quarterly MLP Insights piece providing analysis into the midstream space can be found here as well.

Summary

News:

1) OPEC+ produced around three million barrels of crude oil per day less than planned in its June quotas due to underinvestment in recent years and sanctions on some members. Despite the U.S.’ pleas for more supply, OPEC+ is likely to keep September’s output unchanged at its next meeting. OPEC+ is expected to fully unwind output cuts imposed in 2020 due to the pandemic by August this year.

2) Phillips 66 (PSX) and H2 Energy Europe closed on a joint venture, JET H2 Energy Austria (JET H2 Energy), to create a European network of hydrogen refueling stations. The joint venture would combine PSX’s retail expertise and H2 Energy’s hydrogen expertise to build around 250 hydrogen-refueling stations by 2026.

3) Canada-based Enbridge Inc. (ENB) has formed a $1.5 billion partnership with Pacific Energy Corp. Ltd to build and operate the Woodfibre liquefied natural gas (LNG) project. It comes amid a surge in LNG imports from North America and rising demand for fuel as Europe seeks to replace lost Russian gas supplies following Russia’s invasion of Ukraine.

Sources: Reuters. (2022, July 29). OPEC+ production struggles widen to nearly 3 million barrels per day.; Reuters. (2022, July 29). Oil prices pushed up by low chances of OPEC+ supply boost. CNBC.; Phillips 66 (PSX). (2022, July 19). Phillips 66 and H2 Energy Europe close on joint venture to create European network of hydrogen refueling stations [Press release].; Williams, N., & Kumar, A. (2022, July 29). Canada’s Enbridge to invest $1.5 billion in Pacific Energy’s Woodfibre LNG project.

Performance: Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, increased by 12.71% last month. The index increased by 24.87% since last July. (Source: Bloomberg)

Yield: The current yield on MLPs stands at 7.33%. MLP yields remained higher than the broad market benchmarks for Emerging Market Bonds (6.90%), Fixed Rate Preferreds (6.02%) and Investment Grade Bonds (4.33%) and lower than the High Yield Bonds (7.77%).¹ MLP yield spreads versus 10-year Treasuries currently stand at 4.64%, lower than the long-term average of 5.71%.² (Sources: Bloomberg; Board of Governors of the Federal Reserve System. (2022, July 31). Preformatted package: Treasury constant maturities [Data set]. Data Download Program.)

Valuations: The Enterprise Value to EBITDA ratio (EV-to-EBITDA), which seeks to provide more color on the valuations of MLPs, increased by 3.50% last month. Since July 2021, the EV-to-EBITDA ratio is up by approximately 1.24%. (Source: Bloomberg)

Crude Production: The Baker Hughes Rig Count increased to 767 rigs, increasing by 14 rigs from last month’s count of 753 rigs. US production of crude oil in the last week of July remained unchanged from June levels of 12.1 mb/d. (Sources: Baker Hughes. (2022, August 03). North America rig count.; U.S. Energy Information Administration. (2022, August 03). Petroleum and other liquids.)

Definitions

Solactive MLP Infrastructure Index: The Solactive MLP Infrastructure Index is intended to give investors a means of tracking the performance of the energy infrastructure MLP asset class in the United States. The index is composed of Midstream MLPs engaged in the transportation, storage, and processing of natural resources.

S&P MLP Index: S&P MLP Index provides investors with exposure to the leading partnerships that trade on the NYSE and NASDAQ.  The index includes both master limited partnerships (MLPs) and publicly traded limited liability companies (LLCs), which have a similar legal structure to MLPs and share the same tax benefits.

Bloomberg US Corporate High Yield Total Return Index: The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

ICE BofA Fixed Rate Preferred Securities Index: The ICE BofA Fixed Rate Preferred Securities Index tracks the performance of fixed rate US dollar denominated preferred securities issued in the US domestic market.

Bloomberg EM USD Aggregate Total Return Index: The Bloomberg Emerging Markets Hard Currency Aggregate Index is a flagship hard currency Emerging Markets debt benchmark that includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.

Bloomberg US Corporate Total Return Index: The Bloomberg US Corporate Total Return Value Unhedged Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

Crude Oil: Measured based on the Generic 1st ‘CL’ Future, which is the nearest crude oil future to expiration.

EBITDA: Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments.

Average Spread: Average spread is the average of the excess of the MLPs yield over the 10 year treasuries yield.

Enterprise Value (EV): EV is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization.

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