Energy market commentary

Energy market commentary: September 2020

Broad equity and credit markets pulled back in September, and energy markets followed suit.

October 6, 2020 | 5 minute read

Data as of September 30, 2020 unless otherwise noted.

Performance (total returns)

BenchmarksSeptember 2020YTD
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 transitionThe 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.

Key takeaway

  • Broad equity and credit markets pulled back in September, and energy markets followed suit.

  • Bloomberg.

  • Wells Fargo Research.

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.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Search our site