Energy market commentary: March 2019

Data as of March 31, 2019 unless otherwise noted

Performance (total returns)

Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

March closes out a stellar Q1 for energy: March brought to a close a stellar Q1 for the energy sector, driven by rallying markets and an improving commodity backdrop. The stock market had its best quarter since 2009, and S&P Energy’s 16.43% quarterly return was its own 7-year best. The AMEIX was up over 20%, buoyed by falling bond yields as well as another positive quarter for earnings. HY Energy outperformed the broader high yield market, though many of the lower-rated names have yet to fully recover from their December lows.¹ All eyes in the commodity market have been on OPEC and Russian crude production data to gauge the level to which they are meeting supply-cut promises. Saudi Arabia has led the way on a 2.2 million bbl/day reduction for OPEC as of March.¹ Meanwhile Russia, seen as less keen on the planned cuts, has reduced its own supply by 136,000 bbl/day through February, while signaling it plans further decreases.² These tailwinds drove WTI crude prices to a 32.4% gain in Q1, the best since Q2 2009.¹

Is there still upside for midstream? Midstream equities exploded out of the gates in 2019, with Q1 finishing as the best quarter for the AMZX and AMEIX since 2016 and 2009, respectively.¹ In addition to rising commodity prices and broader equity strength, declining long-term interest rates made the dividend yields on midstream stocks even more enticing. With YTD returns north of 20%, it is fair to take a fresh look at sector valuations. Enterprise value/EBITDA (EV/EBITDA), a commonly used valuation metric in the sector,³ currently sits at 11.2 for the AMEIX, which is well below its historical median of 12.8. In fact, midstream is currently trading at a lower valuation multiple than utilities, another yield-based sector, which has never happened in the history of the index.¹ While sector volatility and corporate reorganizations have likely contributed to this dynamic, we believe that higher return and dividend growth potential within midstream should support a higher multiple. While returns so far this year have been robust, valuation levels still suggest investors looking at the space may have not necessarily “missed the boat.”

Key takeaways

• Energy markets closed out a strong Q1 with their third consecutive month of positive returns.
• Crude prices increased 32% in Q1 as production cuts have worked as intended.
• While midstream has outperformed this year, we believe valuations remain at attractive levels.