Data as of August 31, 2020 unless otherwise noted.
Performance (total returns)
|Alerian MLP Index (AMZX)||0.52%||-37.67%|
|Alerian Midstream Energy Select Index (AMEIX)||2.77%||-28.84%|
|ICE BofAML U.S. High Yield Energy Index (HY Energy)||1.46%||-13.93%|
|S&P 500 Energy Index (S&P Energy)||-1.02%||-39.28%|
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Energy rebound continued to lag the market: Broad equity markets sustained their remarkable recovery during August, with the S&P 500 reaching an all-time high and closing the month at 3,500. Energy continues to be a laggard in the rebound, and S&P Energy was one of just two sectors to finish August with a negative return (the other being utilities). As we wrote last month, June and July likely marked the nadir of global crude supply, with declines in the U.S. and Canada flattening and OPEC+ announcing its intention to remove part of its production cuts. On the demand side, the picture remains murky. U.S. crude consumption has recovered significantly from April lows but is still around 9% below normal levels. COVID-19 remains a significant source of uncertainty for global demand, as illustrated by recent upticks in some European nations. The combination of these factors has kept WTI prices anchored in the low $40/bbl range. The midstream subsector, which has weathered the pandemic better than other parts of the energy sector, has consequently outperformed S&P Energy by around 9% over the past 2 months.1
Checking in on energy earnings: Since the onset of the pandemic, it has been clear that the energy sector would be among the hardest hit in the market. As expected, total EPS in Q2 for S&P Energy, which consists mostly of large integrated producers, fell to -$4.16, by far the worst quarter since the global financial crisis. Consensus analyst EBITDA estimates for full-year 2020 have fallen by over 50% since January. As a result, energy has been far and away the worst-performing sector in the S&P 500 since the crisis began.2 Within energy, however, there is significant disparity. Earnings within midstream, or energy infrastructure, have held up much better than other areas of the sector. Consensus 2020 EBITDA estimates for the AMEIX, which tracks the MLP and C-corp midstream space, fell by only 1% from January to August, and expectations for 2021 have declined just 2.5%.2 Of the 28 companies tracked by Alerian, 22 either raised or maintained their forward guidance in Q2. The discrepancy between midstream and the rest of the energy sector illustrates the defensiveness of the midstream business model, which is largely based on long-term fixed contracts. Despite this impressive resiliency, the AMEIX remains more than 30% below its 2020 high.2 While relative midstream returns have improved over the past few months, we think there could be more strong performance ahead given stable earnings and depressed valuations.
- Despite stock prices that remain well below early 2020 levels, midstream earnings expectations have held up well.