Energy market commentary: May 2018

Data as of May 31, 2018 unless otherwise noted

Performance (total returns)

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

The midstream rally continues: All four energy benchmarks realized positive returns in May, which marked the second consecutive month during which both the AMZX and AMEIX recorded returns north of 5%. S&P Energy, which has a relatively higher weighting toward upstream companies, has benefited over the past couple months from climbing oil prices. While the commodity price backdrop continued to be generally supportive for both midstream and upstream companies, oil prices did decline slightly this month as OPEC and its partners, including Russia, indicated they could decide to increase supply at their meeting in June. This news caused S&P Energy to give back some of its gains at the end of the month while the AMEIX and AMZX, which are generally thought to be less commodity-sensitive, maintained their strong returns. HY Energy posted positive returns but lagged the other benchmarks given the already high average prices of many energy credit issuers.

Wave of corporate “simplification” transactions: While the Federal Energy Regulatory Commission (FERC) ruling in March may have ended up expediting the process, the trend of MLPs looking to transition into more traditional C-corps has been a topic of great interest in the midstream sector for the past few years. In May the market saw a breakthrough in this regard, as the number of MLPs was reduced by five. Enbridge, Inc. (ENB) bought up EEP, EEQ and SEP, while Cheniere Energy, Inc. and Williams Companies, Inc. each acquired their respective MLPs. On top of this, there are several more transactions that may be finalized in the near future.¹ Given changing tax laws and investor preferences, the market is now placing a premium on midstream C-corps instead of MLPs, which trade at an 11.6x EV/EBITDA multiple, versus 10.6x for large-cap midstream MLPs. The conversion to a C-corp structure is no sure thing, but many companies are betting that a simpler structure and better access to investors will help drive returns.²

Key takeaways

• The energy market saw its second straight positive month with the AMZX and AMEIX outperforming both S&P Energy and HY Energy.
• Energy midstream and infrastructure saw broad-based gains, with U.S. C-corps, U.S. MLPs, Canadian infrastructure companies and U.S. general partners all posting positive returns.
• May saw five “simplification” transactions, which involve converting or rolling an MLP into a C-corp structure.