Data as of September 30, 2020 unless otherwise noted.
Performance (total returns)
|Alerian MLP Index (AMZX)||-16.26%||-46.16%|
|Alerian Midstream Energy Select Index (AMEIX)||-11.17%||-36.79%|
|ICE BofAML U.S. High Yield Energy Index (HY Energy)||-4.30%||-17.63%|
|S&P 500 Energy Index (S&P Energy)||-14.51%||-48.09%|
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.
Markets took a pause: Broad equity markets took a breather in September, with the S&P 500 declining -3.80% amid concerns over steep valuations and uncertainty around the timing of further fiscal stimulus. The S&P Energy index declined -14.51%, its fifth consecutive month underperforming the headline index. Midstream equities suffered a setback as well, as crude production in the U.S. has plateaued around 11 MMbpd, 17% below pre-pandemic levels. HY Energy fell -4.30%, driven by spread widening of about 105 bps; spreads in the broader high yield market widened by a more modest 33 bps. Crude prices continued to trade within a tight band in September, closing the month at $40.22/bbl. While this is an improvement over prices around the beginning of the COVID-19 crisis, it is a level at which most U.S. producers struggle to make a profit. At this juncture, it appears prices will remain anchored around this level until there is a sustained global recovery in energy demand.1,2
Midstream and the energy transition: The transition toward a world with lower (and possibly eventually zero) carbon emissions has been underway for some time and continues to gain steam. As traditional energy investments have been battered by the pandemic so far this year, the WilderHill Clean Energy Index, made up of renewable energy firms, has gained 78.89%. Thus far, allocation of capital toward wind and solar energy assets has come mostly from the large integrated producers and utilities, rather than midstream firms. However, as the renewables market continues to grow, we believe midstream firms will begin to play a larger role for two reasons. First, we continue to see changing sentiment toward energy from a social, political and investment standpoint. Investors and the public at large have increasingly incorporated ESG issues into their decisions, and the possibility of attracting new investors will be appealing to midstream companies. Second, returns on capital on renewable energy projects continue to improve. While in general they remain below the returns that can be expected from pipeline projects, they offer more contractual certainty and can help diversify a company’s asset base. To be clear, this is a long-term, strategic transition that will not be completed in the next year or even the next five years. However, as we’ve noted, midstream valuations remain depressed despite resilient financial results. An effort to invest in renewables projects could help alleviate investor concerns around the long-term “terminal value” of midstream firms, and ultimately could lead to increased current valuations.
- Broad equity and credit markets pulled back in September, and energy markets followed suit.