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Midstream At The Midpoint: Where We've Been And What's Next

Jun. 12, 2020 8:00 AM ETOKE, PSX, MPLX, NBLX, SHLX, TRGP, WPX9 Comments
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  • The recent recovery in energy has been multifaceted against the backdrop of an improving fundamental outlook for oil. For midstream in particular, constructive company updates before and during 1Q20 earnings season and resilient distributions from larger names have likely supported performance.
  • For the MLPs that did not reduce their distributions for 1Q20, coverage has remained manageable or better relative to history, with some names seeing only small decreases compared to the same period last year.
  • While macro uncertainty persists, midstream continues to offer compelling income opportunities while working on other improvements, namely reducing leverage and moving toward free cash flow generation.

Investment Considerations

For midstream investors, 2020 has undoubtedly been a roller coaster. Despite the downturn in both energy and broader markets in the first quarter, midstream has rallied significantly in the last few months off the all-time lows seen in mid-March. Today's research note provides a broad update on where midstream stands approaching the halfway point of this year in terms of leverage, yields, and distribution coverage. It also discusses the factors that could determine whether the current recovery continues or potentially pauses.

Energy sell-off into March gives way to recovery.

After a tepid start to the year, energy performance turned down sharply in March as a result of simultaneous supply and demand shocks in oil markets. Saudi Arabia and Russia became entangled in an oil price war in early March. At the same time, oil demand began to nosedive as travel and global economic activity slowed significantly in the wake of mandatory lockdowns designed to stem the spread of COVID-19. From December 31 to midstream's low on March 18, the Alerian MLP Infrastructure Index (AMZI) decreased 67.4%, while the Alerian Midstream Energy Select Index (AMEI) fell 61.9% on a price-return basis (see table below). No sector of energy was spared as West Texas Intermediate (WTI) crude prices fell 66.6% in conjunction with a significant drop in broader markets.

Since March, there has been a marked improvement in energy equities, including midstream. OPEC and its allies agreed to a deal in April to substantially curb oil output beginning in May and extended those cuts last week. After bottoming in April and the front-month contract briefly trading negative, oil prices saw a swift recovery, with WTI crude prices nearing $40 per barrel earlier this week. Year-to-date through June 8, MLPs, represented by the AMZI, are down 24.8%, while broader midstream represented by the AMEI has decreased 19.5% on a price-return basis. The recovery

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Comments (9)

cgharib1 profile picture
Thank for this report and bringing together the various partnership data!
Greg_Maryland profile picture
Nice note. I'm very long MPLX and ET.
jwillis99 profile picture
MLPs are simply not investable. Mgt teams are mostly corrupt, rewarding themselves huge compensation for absolutely miserable performance. Even when these things are headed into bankruptcy, huge bonus payments get made to mgt and they retain their jobs. This entire industry is a disgrace. Investors need to turn their backs on these pig stocks and refuse to invest in the space. Its simply throwing good money out the window.
but...the yield xD

A lot of people are skeered of MLPs, and entitled to their opinions. Yours is unconstructive.

What are you investing in? And why? Do the acclaimed mgt teams of your picks buy their own cooking? (As some big midstream MLP's teams are doing?) Inquiring minds await your answers. Cheers
elliot_mllr profile picture
jwillis99's opinions are not substantiated and are irrational. Hi comments simply are not credible.
Elliot Miller
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