Energy market commentary: September 2018

Data as of September 30, 2018 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.

Energy prices help lift upstream and integrated companies: Energy prices ticked up in September, with Brent crude reaching $80/barrel for the first time since 2014 and natural gas rising above $3/MMBtu.¹ The crude market continues to show inventory drawdowns as global supply issues have hit the market. S&P Energy, which primarily contains large-cap energy stocks, took advantage, up 2.59% for the month and 7.46% YTD. Meanwhile, HY Energy finished off its second consecutive solid quarter, gaining 2.31% among strength in the broader high yield bond market.¹ The midstream subsector showed weakness in September but was still positive overall in the third quarter. In particular, midstream was affected by outsized losses in a few names that are exposed to Colorado. The state has a proposition on the ballot in November that, if passed, would significantly decrease the amount of drillable land throughout Colorado. While neither national party supports the passage of Prop 112, due in part to the sizable loss in annual tax dollars from the oil & gas industry, the market has taken a cautious approach to exposed companies. While these regulatory issues are worth watching going forward, midstream fundamentals remain strong.²

How retail investors are accessing the midstream: The midstream subsector, and especially MLPs, has long been seen as attractive for retail investors due in part to the relatively high level of yield offered by the subsector. However, newly available data suggests that the way investors are accessing the midstream has changed in recent years. In 2008, retail investors accounted for about 50% of public MLP equity; in 2017, that number was down to only 40%.³ However, while direct retail ownership may generally be down, investors are increasingly more interested in MLP/energy infrastructure funds rather than investing directly in the companies. Mutual funds and ETFs now account for 12% of MLP equity ownership, up from 3% in 2008.² This shift may be the result of any number of factors including investor preference for funds over individual securities, a trend toward passive indexing and, specific to MLPs, resistance to dealing with complicated K–1 tax forms. As of August 31, energy limited partnership funds had positive net flows of nearly $2 billion YTD.⁴ As midstream fundamentals improve, there may be an opportunity for funds to continue to replace direct allocations as the preferred vehicle for investing in midstream energy.²

Key takeaways

• Upstream and integrated oil companies bounced back in September while midstream performance was negative.
• Risks in Colorado weighed on midstream sentiment.
• Retail investors are increasingly using funds to access the energy infrastructure space.