The May MLP Monthly Report can be found here offering insights on MLP industry news, the asset class's performance, yields, valuations, and fundamental drivers.
1) Anadarko Petroleum Corporation (APC) received a higher takeover offer of $38 billion from Occidental Petroleum Corporation (OXY). APC agreed on a $33 billion deal to sell its business to Chevron Corporation (CVX) on April 12. If APC officially declares OXY's offer to be superior, CVX can either make a new offer or take the $1 billion break-up fee and abandon the deal. APC is the sponsor of Western Midstream Partners, LP (WES).
2) Blackstone Group, LP (BX) announced it would convert from a publicly traded partnership to a corporation, effective July 1, 2019. The C-Corp structure may remove certain ownership restrictions on partnership units like BX and enable a wider investor base to purchase their equity.
3) Apollo Global Management, LLC (APO) also announced a conversion from a partnership to a corporation by Q3 2019. The C-Corp structure is expected to simplify APO's structure and broaden its shareholder base. The additional tax burden for C-Corps has reduced with the lowering of the headline U.S. corporate tax rate to 21% from 35%, effective last year. This has become an incentive for many partnerships to convert to C-Corps.
Sources: Bloomberg, Occidental Petroleum Corporation, Blackstone Group, LP, Reuters, Apollo Global Management, LLC.
Performance: Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, fell by -1.34% last month. The index is up 2.54% since last April. (Source: Bloomberg)
Yield: The current yield on MLPs stands at 8.07%. MLP yields remained higher than the broad market benchmarks for High Yield Bonds (6.12%), Emerging Market Bonds (6.10%), Fixed Rate Preferreds (5.61%), and Investment Grade Bonds (3.70%).1 MLP yield spreads versus 10-year Treasuries currently stand at 5.37%, higher than the long-term average of 4.44%.2 (Sources: Bloomberg, AltaVista Research, and Fed Reserve)
Valuations: The Enterprise Value-to-EBITDA ratio (EV-to-EBITDA), which seeks to provide more color on the valuations of MLPs, fell -8% last month. Since April 2018, the EV-to-EBITDA ratio has fallen by approximately -21%. (Source: Bloomberg)
Crude Production: The Baker Hughes Rig Count fell last month to 991 rigs, falling by 15 rigs from last month's count of 1006 rigs. The rig count has more than doubled since its recent low point in May 2016 of 404 rigs. US production of crude oil rose to 12.300 mb/d in the last week of April compared to 12.200 mb/d in March. (Source: Baker Hughes and EIA)
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. For performance data current to the most recent month- and quarter-end, please click here
As of 04/30/2019, Western Midstream Partners, LP was a holding in the Global X MLP ETF (MLPA), with a 5.00% weighting.
The Global X MLP and Energy Infrastructure ETF (MLPX) and the Global X MLP ETF do not have any holding in Anadarko Petroleum Corporation, Occidental Petroleum Corporation, Chevron Corporation, Blackstone Group, LP and Apollo Global Management, LLC.
1. Asset class representations are as follows, MLPs, Solactive MLP Infrastructure Index; High Yield Bonds, Bloomberg Barclays US Corporate High Yield Index; Preferreds, ICE BofA Merrill Lynch Fixed Rate Preferred Securities Index; Emerging Market Bonds, J.P. Morgan EMBI Global Core Index; Investment Grade Bonds, iBoxx USD Liquid Investment Grade Index
2. MLPs are represented by the S&P MLP Index.
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.
Solactive MLP & Energy Infrastructure Index: The Solactive MLP & Energy Infrastructure Index is intended to give investors a means of tracking the performance of MLPs and energy infrastructure corporations. Midstream energy infrastructure MLPs and corporations principally own and operate assets used in energy logistics, including, but not limited to, pipelines, storage facilities and other assets used in transporting, storing, gathering, and processing natural gas, natural gas liquids, crude oil or refined products. The index limits its exposure to partnerships in order to comply with applicable tax diversification rules. Securities must be publicly traded in the United States. The index is maintained by Solactive AG.
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 Barclays US Corporate High Yield Index: The Bloomberg Barclays 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 Barclays EM country definition, are excluded.
ICE BofA Merrill Lynch Fixed Rate Preferred Securities Index: ICE BofA Merrill Lynch Fixed Rate Preferred Securities Index tracks the performance of fixed-rate, US dollar-denominated preferred securities issued in the US domestic market.
J.P. Morgan EMBI Global Core Index: J.P. Morgan EMBI Global Core Index is a broad, diverse U.S. dollar-denominated emerging markets debt benchmark that tracks the total return of actively traded external debt instruments in emerging market countries.
iBoxx USD Liquid Investment Grade Index: The iBoxx USD Liquid Investment Grade index measures the performance of 600 highly liquid investment grade corporate bonds.
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.
This information is not intended to be individual or personalized investment or tax advice. Please consult a financial advisor or tax professional for more information regarding your tax situation.
Global X Management Company, LLC serves as an advisor to the Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO, 1 Freedom Valley Drive, Oaks, PA, 19456), which is not affiliated with Global X Management Company, LLC.
Investing involves risk, including possible loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in securities of MLPs involve risk that differ from investments in common stock including risks related to limited control and limited rights to vote on matters affecting the MLP. MLP common units and other equity securities can be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer's financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow). The Global X MLP Funds invest in the energy industry, which entails significant risk and volatility. The Funds invest in small and mid-capitalization companies, which pose greater risks than large companies. MLPA has a different and more complex tax structure than traditional ETFs and investors should consider carefully the significant tax implications of an investment in the Fund. The Funds are non-diversified. Current and future holdings are subject to risk.
MLPA is taxed as a regular corporation for federal income tax purposes, which differs from most investment companies. Due to its investment in MLPs, the fund will be obligated to pay applicable federal and state corporate income taxes on its taxable income as opposed to most other investment companies. The fund expects that a portion of the distributions it receives from MLPs may be treated as tax-deferred return of capital. The amount of taxes currently paid by the fund will vary depending on the amount of income and gains derived from MLP interests and such taxes will reduce an investor's return from an investment in the fund. The fund will accrue deferred income taxes for any future tax liability associated certain MLP interests. Upon the sale of an MLP security, the fund may be liable for previously deferred taxes which may increase expenses and lower the fund's NAV.
The potential tax benefits from investing in MLPs depend on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund's value.
Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. In addition to the normal risks associated with investing, real estate and REIT investments are subject to changes in economic conditions, credit risk and interest rate fluctuations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. In addition, preferred stock may not pay a dividend, an issuer may suspend payment of dividends on preferred stock at any time, and in certain situations an issuer may call or redeem its preferred stock or convert it to common stock.
U.S. Treasury securities are considered to be of high credit quality and are backed by the full faith and credit of the U.S. government. U.S. Treasury securities, if held to maturity, guarantee a return of principal while no other securities mentioned in this material offer such a guarantee.
Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Market price returns are based upon the midpoint of the bid/ask spread at the close of the exchange and does not represent the returns an investor would receive if shares were trade at other times. Brokerage commissions will reduce returns. Global X NAVs are calculated using prices as of 4:00 PM Eastern Time.
Solactive Indexes have been licensed by Solactive AG for use by Global X Management Company, LLC. Global X Funds are not sponsored, endorsed, issued, sold, or promoted by Solactive AG nor does this company make any representations regarding the advisability of investing in the Global X Funds.
Indices are unmanaged and do not include the effect of fees, expenses or sales charges. One cannot invest directly in an index.
Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the Funds' summary and full prospectuses, which may be obtained by calling 1-888-GX-FUND-1 (1-888-493-8631), or by visiting www.globalxfunds.com. Read the prospectus carefully before investing.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.