Energy market commentary

Energy market commentary: August 2020

Despite stock prices that remain well below early 2020 levels, midstream earnings expectations have held up well.

September 4, 2020 | 5 minute read

Data as of August 31, 2020 unless otherwise noted.

Performance (total returns)

BenchmarksAugust 2020YTD
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 earningsSince 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.

Key takeaway

  • Despite stock prices that remain well below early 2020 levels, midstream earnings expectations have held up well.

  • Bloomberg Finance, L.P.

  • Alerian.

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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