MLP Monthly Report: January 2023

The January 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) Vladimir Putin signed a decree prohibiting sales under contracts that comply with the $60 price ceiling imposed by Ukraine’s Western allies in response to the G7’s efforts to limit gains from the country’s oil revenues. However, the decree states that Putin may grant special permission to sell oil and oil products in certain circumstances even if purchasers adhere to the cap, potentially allowing Russia to sell crude to producers in markets such as India and China.

2) OPEC+ oil output increased slightly in December despite production cuts to support the market, primarily led by a recovery in Nigerian supply from outages. Nigeria has been fighting crude theft and insecurity in its oil-producing region for months, reducing output. Even though many Nigerian crude streams produced more in December, with some companies citing improved security, a few producers in Nigeria and Angola continue to lack the capacity to pump at agreed-upon levels, resulting in a shortfall in output expectations.

3) The Biden administration intends to replenish the nation’s emergency oil reserves, beginning with a crude purchase of 3 million barrels. The purchase of barrels for February’s delivery follows a historic 180 million barrel release of oil from the US Strategic Petroleum Reserve to combat high gasoline prices caused by Russia’s invasion of Ukraine and other supply issues. This repurchase allows American taxpayers to save money by repurchasing oil at a lower price than the average selling price of $96 per barrel while strengthening energy security.

Sources: Stognei, A. (2022, December 28). Putin imposes oil ban on buyers complying with G7 price cap. Financial Times.; Lawler, A. (2023, January 4). OPEC oil output rises in December on Nigeria rebound -survey. Reuters.; Natter, A. (2022, December 17). White House begins plan to refill US emergency oil reserves. Bloomberg.

Performance: Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, decreased by 4.25% last month. The index increased by 29.08% since last December. (Source: Bloomberg)

Yield: The current yield on MLPs stands at 7.55%. MLP yields remained higher than Emerging Market Bonds (7.52%), Fixed Rate Preferreds (7.31%), and the broad market benchmark for Investment Grade Bonds (5.42%) and lower than High Yield Bonds (8.99%).¹ MLP yield spreads versus 10-year Treasuries currently stand at 3.58%, lower than the long-term average of 5.64%.² (Sources: Bloomberg; Board of Governors of the Federal Reserve System. (2022, December 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, decreased by 2.26% from last month. Since December 2021, the EV-to-EBITDA ratio is down by approximately 1.48%. (Source: Bloomberg)

Crude Production: The Baker Hughes Rig Count decreased to 779 rigs, decreasing by 5 rigs from last month’s count of 784 rigs. US production of crude oil stood at 12,100 mb/d in the last week of December same as November levels of 12,100 mb/d. (Sources: Baker Hughes. (2022, January 11). North America rig count.; U.S. Energy Information Administration. (2022, January 11). Petroleum and other liquids.)

For performance data current to the most recent month- and quarter-end, please click here.

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.