End of Year MLP Update: Positive Outlook

Author: Ted Gardner, CFA
Date: December 20, 2016
Category: MLPs
Tags: ,

This quarter has been a whirlwind for the energy space. Among the notable events were the surprise presidential election of Donald Trump and the agreement to cut oil production by the Organization of the Petroleum Exporting Countries (OPEC), both of which have been positive for global energy markets thus far.1 The Salient MLP team believes that these key events may continue to bolster the energy recovery into 2017.2

  • The Alerian MLP Index (AMZ) currently yields 7.4% and we believe there is the potential for higher dividend growth in 2017.3,4
  • MLP valuations appear attractive and fund flows are increasing thus far.5
  • Fundamentals in the MLP space are improving, with crude oil’s recovery above $50 per barrel ($26 low on 2/11/16) and natural gas trading above $3.75 per Million British thermal unit ($1.60 low on 3/3/16). Crude oil hit an 18-month high of $53.32 per barrel on 12/12/16.3,6
  • We believe the incoming Trump Administration will result in a less stringent regulatory environment and will be more friendly to the energy industry in general given the president-elect’s choice of Scott Pruitt (Oklahoma Attorney General) to lead the Environmental Protection Agency (EPA), Rex Tillerson (CEO of ExxonMobil) for Secretary of State, and Rick Perry (former Governor of Texas) to be Secretary of Energy.7
  • Many investors believe the election of Donald Trump may result in higher economic growth, lower tax rates, and higher interest rates in 2017.
  • Rig count, an important barometer for volume trends, bottomed at 404 in May 2016 and has grown by 35% to 624 in December 2016.8

OPEC provided support for crude oil prices by lowering production to 32.5 million barrels per day (mmbpd).9 There has not been a cut to oil production in eight years, so the sudden shift from a price war to an agreement to cut production demonstrates the degree of damage to government budgets and the reduction in government-funded social services for most OPEC countries during the past two years. Destabilizing events have negatively impacted supply in other OPEC member countries, including escalating protests in Venezuela, repeated acts of terrorism directed at oil infrastructure in Nigeria, and a near freeze in oil exports from Libya due to that country’s stalemated civil war. We think these factors as well as the pressures from a prolonged period of low oil prices helped pave the way for the agreement on production cuts.

The OPEC agreement had an immediate impact on the energy industry with oil prices moving 12% higher following the announcement.3 We believe higher prices may encourage more domestic drilling, which in turn may lead to increased volumes across the midstream value chain.

 

1http://www.npr.org/sections/thetwo-way/2016/11/30/503863756/opec-agrees-to-first-cut-in-oil-production-since-2008
2Source: Salient Capital Advisors, LLC. November 30, 2016.
3Source: Bloomberg. November 30, 2016.
4Past performance is not indicative of future results. MLP distributions are not guaranteed and subject to change based on market or other conditions. All or a portion of MLP distributions will be considered a return of capital.
5Source: Bloomberg, U.S. Capital Advisors. September 30, 2016.
6http://www.reuters.com/article/us-global-oil-idUSKBN141017
7http://www.vanityfair.com/news/2016/12/donald-trump-scott-pruitt-epa
http://www.nytimes.com/2016/12/12/us/politics/rex-tillerson-secretary-of-state-trump.html?_r=0
http://www.nytimes.com/2016/12/13/us/politics/rick-perry-energy-secretary-trump.html
8http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-rigcountsoverview
9http://money.cnn.com/2016/11/30/investing/opec-oil-prices-production-agreement/

DISCLOSURES

Investing involves risk, including possible loss of principal. The value of any financial instruments or markets mentioned herein can fall as well as rise. Past performance does not guarantee future results.

This material is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer or solicitation with respect to the purchase or sale of any investment. Statistics, prices, estimates, forward-looking statements, and other information contained herein have been obtained from sources believed to be reliable, but no guarantee is given as to their accuracy or completeness. All expressions of opinion are subject to change without notice.

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Registration as an investment advisor does not imply any level of skill or training.


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