• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 3 hours GREEN NEW DEAL = BLIZZARD OF LIES
  • 1 day "What’s In Store For Europe In 2023?" By the CIA (aka RFE/RL as a ruse to deceive readers)
  • 6 days America should go after China but it should be done in a wise way.
  • 1 day World could get rid of Putin and Russia but nobody is bold enough
  • 1 day How Far Have We Really Gotten With Alternative Energy
  • 7 hours Even Shell Agrees with Climate Change!
  • 2 days The European Union is exceptional in its political divide. Examples are apparent in Hungary, Slovakia, Sweden, Netherlands, Belarus, Ireland, etc.
  • 12 days Does Toyota Know Something That We Don’t?
  • 4 days Oil Stocks, Market Direction, Bitcoin, Minerals, Gold, Silver - Technical Trading <--- Chris Vermeulen & Gareth Soloway weigh in

Breaking News:

OPEC Lifts Production in February

Petrobras Plans Dividend Squeeze To Fund Transition to Renewables

Petrobras Plans Dividend Squeeze To Fund Transition to Renewables

Brazil’s state-owned energy heavyweight Petrobras…

This Could Be A Gamechanger For Natural Gas In Europe

This Could Be A Gamechanger For Natural Gas In Europe

Europe’s lack of energy security…

Robert Rapier

Robert Rapier

More Info

Premium Content

Rebound In Oil Prices Helps Prop Up Midstream Sector

  • Since March, several factors have helped drive the midstream recovery.
  • The rebound in oil prices, aided by OPEC’s agreement to substantially curb oil output and then to extended those cuts was probably the most significant factor.
  • Magellan Midstream and Energy Transfer are among those bucking the trend of increasing leverage and hence may find themselves better able to withstand the pressure to cut distributions.

Since the March lows, the midstream sector of the oil and gas industry has recovered most of its losses. While the overall sector is still down for the year, the 19.5% year-to-date loss in the Alerian Midstream Energy Select Index (AMEI) is still better than all other major energy sector benchmarks.  

The latest research note from independent energy infrastructure and master limited partnership (MLP) market intelligence data provider Alerian discusses this year’s roller coaster in the midstream sector. The report notes that from December 31 to the low on March 18, the Alerian MLP Infrastructure Index (AMZI) decreased 67.4%, slightly more than the 66.6% decline in the price of West Texas Intermediate (WTI).

Since March, several factors have helped drive the midstream recovery. The rebound in oil prices, aided by OPEC’s agreement to substantially curb oil output and then to extended those cuts was probably the most significant factor.

But Alerian also identified “constructive company updates before and during 1Q20 earnings season and resilient distributions from larger names” as having likely supported performance. The federal funds rate cut to zero in March was also identified as a potential factor driving investors to seek higher income from the midstream sector.

To position themselves to weather the potentially choppy waters ahead, more than half of the MLPs in the AMZI have cut distributions. This has boosted the coverage ratio of the index constituents from an average of 1.5x in Q4 2019 to 2.6X in Q1 2020.

Thus far major MLPs like Enterprise Products Partners, Energy Transfer LP, Magellan Midstream, and MPLX LP have avoided announcing distribution cuts, but the coverage ratio for all of these names has decreased over the past year.

If the coverage ratios continue to decline, expect to see more distribution cuts, especially for those names where leverage is increasing.

Magellan Midstream and Energy Transfer are among those bucking the trend of increasing leverage and hence may find themselves better able to withstand the pressure to cut distributions.

As noted previously, many midstream companies will first try to cope with falling revenues by cutting capital expenditures. Alerian writes that “the average percent reduction in 2020 spending from each MLP’s initial guidance to current guidance is -24.1%, while the constituents of the AMEI expect to reduce spending by an additional -22.5% over initial guidance for this year.”

This quarter’s financial results will likely be the worst in memory, but investors seem to have already taken those into account. Given the moves the midstream sector has made to shore up its financial metrics in this ongoing crisis, the sector continues to offer a compelling income proposition with less risk than most of the energy sector.

ADVERTISEMENT

By Robert Rapier 

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment

Leave a comment




EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News