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SteelPath December MLP update and news

The master
limited partnership (MLP) sector saw a series of events take place in November,
including the conclusion of third quarter earnings season and yet another MLP
simplification eliminating incentive distribution rights. And while
midstream equities underperformed energy equities and the broader markets in
recent months, the story has been different in the bond market, where energy
credit spreads have widened meaningfully and midstream has outperformed.

Overview

Midstream MLPs, as measured by the Alerian MLP Index (AMZ),
ended November down 6.8% on a price basis and down 5.6% once distributions are
considered. The AMZ results underperformed the S&P 500 Index’s 3.6% total
return for the month. The best performing midstream subsector for November was
the Propane group, while the Natural Gas Pipeline subsector underperformed, on
average.

For the year through November, the AMZ was down 9.7% on a
price basis, resulting in a 2.1% total return loss. This compares to the
S&P 500 Index’s 25.3% and 27.6% price and total returns, respectively. The Compression
group has produced the best average total return year-to-date, while the Gathering
and Processing subsector has lagged.

MLP yield spreads, as measured by the AMZ yield relative to
the 10-Year U.S. Treasury Bond, widened by 46 basis points (“bps”) over the
month, exiting the period at 810 bps. This compares to the trailing five-year
average spread of 550 bps and the average spread since 2000 of approximately 382
bps. The AMZ indicated distribution yield at month-end was 9.9%.

Midstream MLPs and affiliates raised $0.3 billion on new
marketed equity (common or preferred, excluding at-the-market programs) and $1.6
billion of marketed debt during the month. MLPs and affiliates announced $1.2
billion of asset acquisitions over the month.1

Spot West Texas Intermediate (“WTI”) crude oil exited the
month at $55.17 per barrel, up 1.8% over the period and 8.3% higher
year-over-year. Spot natural gas prices ended November at $2.46 per million
British thermal units (“MMbtu”), down 9.9% over the month but 46.6% lower than November
2018. Natural gas liquids (“NGL”) pricing at Mont Belvieu exited the month at $23.8
per barrel, 8.4% higher than the end of October but 5.4% lower than the
year-ago period.

News

Third quarter earnings season concludes. Third quarter reporting season wrapped up in November. Through month-end, 58 midstream entities had announced distributions for the quarter, including 20 distribution increases and 38 distributions that were unchanged from the previous quarter. Through the end of November, 63 sector participants had reported third quarter financial results. Operating performance has been, on average, modestly better than expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 1.2% better than consensus estimates and 2.8% higher than the preceding quarter.

More MLP simplifications
transpire.
DCP Midstream (NYSE: DCP) announced and closed an agreement to
acquire and eliminate their incentive distribution rights (IDRs) from its
sponsors in exchange for 65 million newly issued units of DCP.2
Additionally, Noble Midstream Partners (NBLX) announced an agreement to acquire
its sponsor’s remaining midstream assets, as well as NBLX’s IDRs, for $1.6
billion including 38.5 million newly issued units in NBLX issued to the
sponsor, Noble Energy (NBL).3 Once announced pending transactions are
completed the following entities with IDRs will remain:

Blueknight Energy (BKEP)
 
BP Midstream (BPMP) 
 
CNX Midstream (CNXM) 
 
CrossAmerica Partners (CAPL) 
 
CSI Compressco (CCLP) 
 
Delek Logistics Partners (DKL) 
 
Enable Midstream (ENBL) 
 
Global Partners (GLP) 
 
Martin Midstream (MMLP) 
 
Oasis Midstream (OMP) 
 
Shell Midstream (SHLX) 
 
Sunoco (SUN) 
 
TC Pipeline (TCP) 
 
USD Partners (USDP)
Westlake Chemical Partners (WLKP)
 
 

FERC approves four
LNG facilities.
The Federal Energy Regulatory Commission (“FERC”) approved
four liquefied natural gas (LNG) projects and related facilities to export
natural gas including three projects (Texas LNG, Annova LNG, and Rio Grande LNG)
to be located along the Brownsville Ship Channel in Brownsville, Texas, and a
fourth project (Corpus Christi Stage III) that would expand a currently
operating facility near Corpus Christi, Texas.

Chart of the month

While midstream equities underperformed energy equities and
the broader markets in recent months, the story has been different in the bond
market, where energy credit spreads have widened meaningfully and midstream has
outperformed. This suggests technical factors, such as tax-loss selling and
year-end portfolio repositioning, have carried greater influence on midstream
equity performance than perception of underlying business conditions.

Figure 1: Energy bond
spreads

Source: Bloomberg L.P., as of 11/30/2019. Past performance does not guarantee future results. Investment grade energy is represented by the Bloomberg Barclays US Corporate Energy Index, high yield energy by the Bloomberg Barclays US Corporate High Yield Energy Index, investment grade midstream by the Bloomberg Barclays US Corporate Energy Midstream Index, and high yield midstream by the Bloomberg Barclays US Corporate High Yield Energy Midstream Index.

Footnotes

All data sourced from Bloomberg L.P. as of 11/30/2019 unless
otherwise indicated

1. Sources: SteelPath estimates and company press releases
as of 11/30/19

2. Sources: Company press releases as of 11/06/2019

3. Sources: Company press releases as of 11/15/2019

Important
Information

Blog
Header Image: stanley45 / Getty

A yield spread is the difference in yields between
debt instruments of varying maturities, credit ratings, and risk, calculated by
deducting the yield of one instrument from another

The Bloomberg Barclays US Corporate Energy
Midstream Index includes investment grade rated debt issues from
North American companies involved in the midstream energy infrastructure sector

The
Bloomberg Barclays US Corporate High Yield Energy Midstream Index includes high
yield rated debt issues from North American companies involved in the midstream
energy infrastructure sector.

The
Bloomberg Barclays US Corporate Energy Index includes investment grade rated
debt issues from North American companies involved in the energy sector.

The
Bloomberg Barclays US Corporate High Yield Energy Index includes high yield
rated debt issues from North American companies involved in the energy sector.

The mention of specific companies, industries,
sectors, or issuers does not constitute a recommendation by Invesco
Distributors, Inc.

The mention of specific securities does not
constitute a recommendation to buy/sell on behalf of the Fund or Invesco
Distributors, Inc.

Certain Invesco funds may hold the securities of the
companies mentioned. A list of the top 10 holdings of each fund can be found by
visiting invesco.com.

The S&P 500 Index is a stock market index that
measures the stock performance of 500 large companies listed on stock exchanges
in the United States.

The Alerian MLP Index is a float-adjusted,
capitalization-weighted index measuring master limited partnerships, whose
constituents represent approximately 85% of total float-adjusted market
capitalization. The S&P 500 Index is a broad-based measure of domestic
stock market performance. Indices are unmanaged and cannot be purchased
directly by investors. Index performance is shown for illustrative purposes
only and does not predict or depict the performance of any investment. Past
performance does not guarantee future results.

Investing in MLPs involves additional risks as
compared to the risks of investing in common stock, including risks related to
cash flow, dilution and voting rights. Each fund’s investments are concentrated
in the energy infrastructure industry with an emphasis on securities issued by
MLPs, which may increase volatility. Energy infrastructure companies are
subject to risks specific to the industry such as fluctuations in commodity
prices, reduced volumes of natural gas or other energy commodities,
environmental hazards, changes in the macroeconomic or the regulatory
environment or extreme weather. MLPs may trade less frequently than larger
companies due to their smaller capitalizations which may result in erratic
price movement or difficulty in buying or selling. Additional management fees
and other expenses are associated with investing in MLP funds. Diversification
does not guarantee profit or protect against loss.

The opinions expressed are those of Invesco
SteelPath, are based on current market conditions and are subject to change
without notice. These opinions may differ from those of other Invesco
investment professionals.

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