Data as of December 31, 2019 unless otherwise noted.

PERFORMANCE (TOTAL RETURNS)
BENCHMARKS DECEMBER 2019 YTD
Alerian MLP Index (AMZX) 8.53% 6.56%
Alerian Midstream Energy Select Index (AMEIX) 8.58% 22.35%
ICE BofAML U.S. High Yield Energy Index (HY Energy) 5.62% 5.57%
S&P 500 Energy Index (S&P Energy) 6.03% 11.81%
Performance data quoted represents past performance and is no guarantee of future results. An investment cannot be made directly in an index.

2019: Strong on an absolute basis, weak on relative: The energy sector ended 2019 on a strong note, with each index except S&P Energy having its best month since January. While returns for the year look strong on an absolute basis, the energy sector generally trailed broader markets in 2019. Energy finished as the worst-performing sector in both the S&P 500 and the high yield market.1,2 In the midstream space, a massive performance discrepancy emerged between C-corps and MLPs, as the former beat the latter by nearly 16%. Crude ended the year on a high note, as prices traded above $60/bbl for an extended period for the first time since May. Drawdowns in inventories and an escalation of Middle East tensions have caused oil prices to creep up, even as concerns about global demand waver.1 Looking forward to 2020, energy sector valuations appear relatively attractive; however, the fate of the sector will be decided in large part by variables such as OPEC+ policy, geopolitical issues and U.S. elections.

Looking at 2020 candidates’ stances on fossil fuel regulations: Heading into an election year, we thought it would be interesting to briefly look at how climate policy could impact the energy sector. Climate change is top of mind for Democratic voters, with 75% considering it important or extremely important.3 Thus, it is top of mind for Democratic presidential candidates, who have introduced myriad policy positions, many of which deal with some form of fracking ban. All candidates support either a total fracking ban or call for higher limitations and regulations on fracking. These policies would likely need congressional support to pass. Additionally, nearly all candidates, including the current top four in polling (Biden, Sanders, Warren, Buttigieg),4 support banning fracking on federal lands. On this issue, presidential authority may be broader, making it an attractive place to start for any potential Democratic president. About 22% of crude and 13% of natural gas production occurs on federal lands, most of which is in western basins such as the Permian, Bakken and Rockies. Banning fracking on federal lands would certainly have an impact on U.S. volumes (and potentially prices), especially in the short term as drillers are forced to shutter rigs. However, Wells Fargo estimates that in the longer term, crude and gas volumes would be reduced by only 5% and 2%, respectively, as firms reallocate activities to private lands.5 In summary, a president may have significant authority to ban fracking on federal lands, though this would likely have only a moderate impact on volumes in the long term. A total fracking ban, which would require congressional legislation, would present a much larger issue for the industry.

KEY TAKEAWAYS

  • The energy sector ended 2019 on a high note.
  • The 2020 election could have an impact on the energy sector.

1 Bloomberg Finance, L.P.
2 Bank of America Merrill Lynch.
3 Gallup.
4 RealClearPolitics.
5 Wells Fargo Research, Washington Post.


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.