Energy market commentary

Energy market commentary: November 2018

Oil prices plummet while energy assets fall more modestly. Midstream company results continue to belie market performance.

December 12, 2018 | 4 minute read

Data as of November 30, 2018 unless otherwise noted

Performance (total returns)

BenchmarksNovember 2018YTD
Alerian MLP Index (AMZX)-0.83%-3.38%
Alerian Midstream Energy Select Index (AMEIX)-0.08%-8.99%
ICE BofAML U.S. High Yield Energy Index (HY Energy)-3.58%-2.52%
S&P 500 Energy Index (S&P Energy)-1.65%-6.21%

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

Oil prices plummet while energy assets fall more modestly: Crude oil prices saw their worst monthly percentage decline in a decade during November, with West Texas Intermediate crude falling 22% during the month. Energy equities held up rather well considering the magnitude of the move, with midstream indices down less than 1% and S&P Energy shedding 1.65%. HY Energy had its worst month since February 2016, affected by the commodity sell-off as well as broader pressure in the high yield bond markets. Global oversupply has driven WTI crude prices from a three-year high of $76/bbl to around $50, as all-time high U.S. shale production has resulted in a 46-million-barrel increase in U.S. crude inventories in the past two months.1,2 Russia and OPEC have also steadily increased their supply over the past year, and the IEA projects a global oversupply of more than 1 million barrels/day in 2019. OPEC and its partners will decide before year-end whether a production cut is warranted for next year.1,2

Midstream company results continue to belie market performance: The decline in oil prices has hit energy assets to varying degrees. Integrated oil companies and E&Ps, which typically trade more in lockstep with commodity prices, have fallen more than midstream equities.1 However, one could argue energy infrastructure investments continue to be undervalued, given sector financial performance. Q3 performance was stellar for midstream companies; 100% of AMEIX constituents maintained or increased their distribution for Q4 compared to Q3, while 67% of firms beat median earnings expectations.3 For the AMZX those numbers were 89% and 50%, respectively. Despite these results, the sector has underperformed the broader equity markets this year and over the past three years. We believe that in a market where many assets look expensive, midstream energy is a space worth considering. The energy infrastructure space continues to trade well below its long-term average earnings multiples, offers above-market yield in a low-income environment, and has proven that it offers some protection against commodity volatility compared to other areas of the energy market. Sustained positive company performance and a steadying of the oil market could set the midstream sector up for gains going forward.1

Key takeaways

  • Energy assets fell as crude prices dipped more than 20%.
  • Crude oil fell to $50/bbl in its largest percentage monthly decline since 2008 amid increasing concerns about a global supply glut.

  • EIA.

  • International Energy Agency.

  • Represents median Bloomberg EBITDA estimates.

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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