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MLP Monthly Report: March 2023

Mar 22, 2023

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The March MLP Monthly Report can be found here offering insights on MLP industry news, the asset class’s performance, yields, valuations, and fundamental drivers.

The latest quarterly MLP Insights piece providing analysis into the midstream space can be found here as well.

Summary

News

1) OPEC revised upward its forecast for global oil demand growth in 2023, the first such uptick in months, due to China’s relaxation of COVID-19-induced restrictions and the possibility of US Federal Reserve’s managing a soft landing for the US economy as further positive considerations. OPEC also forecasted a fall in supply from Russia and other non-OPEC producers, indicating a tighter market. Furthermore, the cartel expects a tighter supply-demand balance in 2023, which may bolster oil prices.

2) The energy policy tit for tat between Russia and the West continues. Russia stated that it would cut oil exports from its western ports by up to 25% in March 2023. The voluntary output cuts in March would follow the Western price caps on Russian oil and oil products imposed on December 5 and February 5.

3) The International Energy Agency has increased its projections for global oil demand by 500,000 barrels per day for the first quarter and by less than half this volume for the entire year, resulting in a projected increase in global consumption by 2 million barrels per day for the year. The agency believes the slump in the global economy will likely reverse following China’s reopening, and the nation will likely reclaim its preeminent position as the main driver of rising global oil consumption.

Sources: Lawler, A. (2023, February 14). OPEC+ raises 2023 oil demand growth view, points to tighter market. Reuters.; Reuters. (2023, February 23). Exclusive: Russia plans deep March oil export cuts, sources say.; Smith, G. (2023, February 15). IEA Boosts Global Oil Demand Forecast as China’s Economy Reopens. Bloomberg.

Performance: Midstream MLPs, as measured by the Solactive MLP Infrastructure Index, decreased by 1.40% last month. The index increased by 17.72% since last February. (Source: Bloomberg)

Yield: The current yield on MLPs stands at 7.54%. MLP yields remained higher than the Fixed Rate Preferreds (6.88%), broad market benchmarks for Investment Grade Bonds (5.51%) and lower than the High Yield Bonds (8.68%) and the Emerging Market Bonds (7.54%).1 MLP yield spreads versus 10-year Treasuries currently stand at 3.89%, lower than the long-term average of 5.61%.2 (Sources: Bloomberg; Board of Governors of the Federal Reserve System. (2023, February 28). Preformatted package: Treasury constant maturities [Data set]. Data Download Program.)

Valuations: The Enterprise Value to EBITDA ratio (EV-to-EBITDA), which seeks to provide more color on the valuations of MLPs, increased by 4.40% from last month. Since February 2022, the EV-to-EBITDA ratio is down by approximately 20.48%. (Source: Bloomberg)

Crude Production: The Baker Hughes Rig Count decreased to 753 rigs, decreasing by 18 rigs from last month’s count of 771 rigs. US production of crude oil stood at 12.300 mb/d in the last week of February increased from January levels of 12.200 mb/d. (Sources: Baker Hughes. (2023, March 8). North America rig count.; U.S. Energy Information Administration. (2023, March 8). Petroleum and other liquids.)

For performance data current to the most recent month- and quarter-end, please click here.

DEFINITIONS

Solactive MLP Infrastructure Index: The Solactive MLP Infrastructure Index is intended to give investors a means of tracking the performance of the energy infrastructure MLP asset class in the United States. The index is composed of Midstream MLPs engaged in the transportation, storage, and processing of natural resources.

S&P MLP Index: S&P MLP Index provides investors with exposure to the leading partnerships that trade on the NYSE and NASDAQ.  The index includes both master limited partnerships (MLPs) and publicly traded limited liability companies (LLCs), which have a similar legal structure to MLPs and share the same tax benefits

Bloomberg US Corporate High Yield Total Return Index: The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

ICE BofA Fixed Rate Preferred Securities Index: The ICE BofA Fixed Rate Preferred Securities Index tracks the performance of fixed rate US dollar denominated preferred securities issued in the US domestic market.

Bloomberg EM USD Aggregate Total Return Index: The Bloomberg Emerging Markets Hard Currency Aggregate Index is a flagship hard currency Emerging Markets debt benchmark that includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.

Bloomberg US Corporate Total Return Index: The Bloomberg US Corporate Total Return Value Unhedged Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.

Crude Oil: Measured based on the Generic 1st ‘CL’ Future, which is the nearest crude oil future to expiration.

EBITDA: Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments.

Average Spread: Average spread is the average of the excess of the MLPs yield over the 10 year treasuries yield.

Enterprise Value (EV): EV is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization.

 

Category: Articles

Topics: Income, Income Strategies, MLPs

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Investing involves risk, including possible loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in securities of MLPs involve risk that differ from investments in common stock including risks related to limited control and limited rights to vote on matters affecting the MLP. MLP common units and other equity securities can be affected by macro economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms of distributable cash flow). The Fund invests in the energy industry, which entails significant risk and volatility. MLPA is non-diversified. The Fund invests in small and mid-capitalization companies, which pose greater risks than large companies. MLPA has a different and more complex tax structure than traditional ETFs and investors should consider carefully the significant tax implications of an investment in the Fund. Current and future holdings are subject to risk.

MLPA is taxed as a regular corporation for federal income tax purposes, which differs from most investment companies. Due to its investment in MLPs, the fund will be obligated to pay applicable federal and state corporate income taxes on its taxable income as opposed to most other investment companies. The fund expects that a portion of the distributions it receives from MLPs may be treated as tax-deferred return of capital. The amount of taxes currently paid by the fund will vary depending on the amount of income and gains derived from MLP interests and such taxes will reduce an investor’s return. The fund will accrue deferred income taxes for any future tax liability associated certain MLP interests. Upon the sale of an MLP security, the fund may be liable for previously deferred taxes which may increase expenses and lower the fund’s NAV. The potential tax benefits from investing in MLPs depend on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund’s value.

Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. Real estate and REIT investments are subject to changes in economic conditions, credit risk and interest rate fluctuations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. Preferred stock may not pay a dividend, an issuer may suspend payment of dividends on preferred stock at any time, and in certain situations an issuer may call or redeem its preferred stock or convert it to common stock.

U.S. Treasury securities are considered to be of high credit quality and are backed by the full faith and credit of the U.S. government. U.S. Treasury securities, if held to maturity, guarantee a return of principal while no other securities mentioned in this material offer such a guarantee.

Carefully consider the fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the fund’s full or summary prospectus, which may be obtained by calling (1.888.493.8631), or by visiting globalxetfs.com. Read the prospectus carefully before investing.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Beginning October 15, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn’t available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to October 15, 2020, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time. The returns shown do not represent the returns you would receive if you traded shares at other times. Indices are unmanaged and do not include the effect of fees, expenses or sales charges. One cannot invest directly in an index. Index data source: Solactive AG.

This information is not intended to be individual or personalized investment or tax advice. Please consult a financial advisor or tax professional for more information regarding your tax situation.

Global X Management Company, LLC serves as an advisor to the Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO), which is not affiliated with Global X Management Company LLC or Mirae Asset Global Investments. Solactive Indexes have been licensed by Solactive AG for use by Global X Management Company, LLC. Global X Funds are not sponsored, endorsed, issued, sold, or promoted by Solactive AG nor does this company make any representations regarding the advisability of investing in the Global X Funds.