Energy market commentary

Energy market commentary: August 2018

Upstream and integrated oil companies struggled in August while midstream performance was mixed. MLPs continued their strong run as sentiment has turned more positive. Positive fundamentals drove solid Q2 earnings for many midstream companies.

September 13, 2018 | 4 minute read

Data as of August 31, 2018 unless otherwise noted

Performance (total returns)

BenchmarksAugust 2018YTD
Alerian MLP Index (AMZX)1.58%7.58%
Alerian Midstream Energy Select Index (AMEIX)-1.34%0.06%
ICE BofAML U.S. High Yield Energy Index (HY Energy)0.49%2.90%
S&P 500 Energy Index (S&P Energy)-3.30%4.75%

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

Energy performance mixed as MLPs continue rally: MLPs returned their second consecutive month of outperformance within the energy sector, with the AMZX gaining 1.58% in August. The energy sector was mixed in August, as MLPs and energy credit were positive while the AMEIX and S&P Energy saw losses. Large-cap energy stocks in particular were hit hard as positive commodity sentiment waned during the month. Crude oil prices continued to be rangebound as the market continues to try to gauge both the effects of a potential trade war and how much global production will increase. While the midstream sector had mixed returns, momentum and fundamentals still generally point in the right direction. Since the beginning of the second quarter the AMZX and AMEIX have returned 21.04% and 15.28%, respectively, far outpacing the broader U.S. equity market. Meanwhile, despite a worrisome weekly uptick in crude inventories early in the month that spooked the market, August still saw an aggregate drawdown in inventories. Combined with oil prices around $70 per barrel and near-record production, fundamentals remain supportive for midstream companies.1,2

Q2 earnings show midstream companies benefiting from improved backdrop: As almost all companies have reported Q2 earnings by the end of August, it is a good time to see whether company performance matches positive sentiment in the midstream space. By almost any metric, Q2 was very positive for the sector. Within the AMZX, 63% of constituents beat consensus earnings estimates during Q2; for the AMEIX, that number was 68%.Furthermore, dividend rates for midstream companies remained generally consistent, as 34 out of 39 AMZX constituents and 31 out of 34 AMEIX constituents maintained or grew their quarterly dividend year over year.4 Constructive fundamentals, such as stable crude prices and increasing production, are flowing through to midstream companies’ financial statements. Even with the recent rally, midstream valuations still look attractive with P/E multiples below their 10-year median for both the AMZX and AMEIX. We believe each of these factors makes the current environment look attractive for energy infrastructure investments.1,2

Key takeaways

  • Upstream and integrated oil companies struggled in August while midstream performance was mixed.
  • MLPs continued their strong run as sentiment has turned more positive.
  • Positive fundamentals drove solid Q2 earnings for many midstream companies.

  • Bloomberg.

  • EIA, Alerian.

  • Bloomberg. Consensus earnings estimates represented by Bloomberg consensus EBITDA estimates.

  • Bloomberg. Represents dividends paid during calendar Q2 2017 versus Q2 2018.

Index descriptions: Alerian MLP Index is the leading gauge of energy Master Limited Partnerships (MLPs) and is a float-adjusted, capitalization-weighted index, whose constituents represent approximately 85% of total float-adjusted market capitalization. Alerian Midstream Energy Select Index is a composite of North American energy infrastructure companies and is a capped, float-adjusted, capitalization-weighted index, whose constituents are engaged in midstream activities involving energy commodities. ICE BofAML U.S. High Yield Energy Index is designed to track the performance of U.S. dollar-denominated high yield rated corporate debt publicly issued in the U.S. domestic energy market. S&P 500 Energy Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) energy sector.

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This energy market commentary and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The energy market commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such energy market commentary. The energy market commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the energy market commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

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