Data as of February 28, 2018, unless otherwise noted
Performance (total returns)
| Benchmarks | February 2018 | YTD |
| Alerian MLP Index (AMZX) | -9.69% | -4.49% |
| Alerian Midstream Energy Select Index (AMEIX) | -10.51% | -10.15% |
| ICE BofAML U.S. High Yield Energy Index (HY Energy) | -1.88% | -0.10% |
| S&P 500 Energy Index (S&P Energy) | -10.82% | -7.42% |
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Energy benchmarks pull back: So far this year, the energy sector has been a tale of two halves: up steadily on healthier fundamentals to start the year, and down markedly from late January onward. February was dominated by broader market concerns, as a relatively stable commodity backdrop was overwhelmed by extreme volatility in the broad equity markets. Each energy equity index witnessed a broad-based sell-off with only two stocks across these three indices in positive territory for the month. S&P Energy led the decline as large-cap energy names were particularly weak. AMEIX underperformance against the AMZX was driven by a large non-MLP U.S. infrastructure company that missed Q4 earnings and cut its dividend. As the AMZX only contains MLPs, it was insulated from this particularly negative reaction to an earnings miss. High yield energy proved more defensive than stocks in February, as the sell-off in bond markets was far less severe than that for equities. Even still, within high yield, energy was the weakest sector.
Midstream fundamentals remain steady: Despite the market sell-off, midstream business fundamentals have remained steady. For example, not a single constituent of the AMZX cut its distribution in Q4 compared to Q3, and 21 out of 40 companies actually grew their distribution quarter over quarter. Compared to a year ago, over 80% of the AMZX companies grew or maintained their distribution, with five cutting over that time period. Increasing domestic production and its potential to increase prices may bode well for North American energy and energy infrastructure companies, as the underlying fundamentals continue to improve. U.S. producers have added 55 rigs to the oil-directed rig count year to date, gradually increasing activity in basins with the strongest economics.
Key takeaway
The fundamental conditions for the energy sector have generally improved over the past year. Supply/demand balances are on healthy footing, oil prices have risen, North American assets are among the most globally competitive at current oil prices, and valuations for certain energy companies appear attractive relative to the broader market.
