Data as of December 31, 2018 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS DECEMBER 2018 2018
Alerian MLP Index (AMZX) -9.36% -12.42%
Alerian Midstream Energy Select Index (AMEIX) -9.54% -17.67%
ICE BofAML U.S. High Yield Energy Index (HY Energy) -3.95% -6.37%
S&P 500 Energy Index (S&P Energy) -12.67% -18.10%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

Oil prices continue to fall; energy markets end a rocky year: WTI crude prices ended a volatile year at $45.44/bbl, about $15 below where they started. As recently as early October, prices were above $75/bbl, but a host of factors contributed to the largest quarterly price decline since 2014.1 On the supply side, fears of a glut were exacerbated by building U.S. crude stockpiles, which have risen 47 million barrels since mid-September, and increasing Russian production.1 On the demand side, trade tensions and unimpressive global economic data stoked concerns. Energy equities fell alongside the rest of the stock market, which saw its worst December since 1931. Within energy, large-cap energy stocks were the top decliner on the month, while midstream indices each decreased around 9%. HY Energy sold off nearly 4% as spreads widened nearly 150 bps and the broader high yield bond market continued to see significant outflows.1 Looking to 2019, the market will be watching to see how effective OPEC’s agreed-upon production cuts are at stemming potential global oversupply concerns.

Year-end review: Is now a good time to allocate to energy?: A promising year for energy investors gave way to a reversal in the fourth quarter, as oil prices plummeted and global financial markets fell into bear-market territory. Midstream indices finished down less than S&P Energy, but the AMZX and AMEIX still declined by 12.42% and 17.67%, respectively, in 2018. The question that will be asked is whether this represents a buying opportunity, or if the recent dip portends further losses for the space. We believe three factors point to a potential buying opportunity: macro fundamentals, company financial performance and valuations. While oil price fundamentals have taken a negative turn, the midstream backdrop remains solid. The EIA expects U.S. production to continue to increase, which will necessitate further capital investment opportunities for infrastructure firms.1 We believe this will further support midstream financial performance, where over half of constituents in the two Alerian indices beat median EBITDA expectations in both Q2 and Q3 2018.2 Despite this strong performance, valuations are at multi-year lows. The P/E ratio of the AMEIX is currently 16.24, the lowest on record, while the P/E of the AMZX is 13.77, the lowest quarterly mark since 2009.3 Additionally, the spread to 10-year Treasury yield for each index ended the year approximately 150 bps wider than their respective 5-year average.4 To conclude, we believe that a solid backdrop will help continue to drive positive company performance, and that historically low valuations may present an attractive entry point for investors heading into 2019.

KEY TAKEAWAY

  • Energy markets declined sharply as oil prices fell and equity markets sold off.
  • Crude oil fell another $5.26/bbl amid continuing concerns of a supply glut.
  • The recent energy sell-off has pushed midstream valuations to multi-year lows.

1 EIA.
2 Reported EBITDA versus Bloomberg median EBITDA estimate.
3 Bloomberg. Ratio of price to earnings per share.
4 Bloomberg. Spread of index trailing 12-month dividend yield to 10-year Treasury yield.


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.