Energy market commentary

Energy market commentary: February 2018

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 energy companies appear attractive relative to the broader market.

March 12, 2018 | 4 minute read

Data as of February 28, 2018, unless otherwise noted

Performance (total returns)

BenchmarksFebruary 2018YTD
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.

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.

The indexes referenced herein are the exclusive property of each respective index provider and have been licensed for use by FS Investments. The index providers do not guarantee the accuracy and/or completeness of the indexes and accept no liability in connection with the use, accuracy, or completeness of the data included therein. Inclusion of the indexes in these materials does not imply that the index providers endorse or express any opinion in respect of FS Investments. Visit for more information.

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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