Money continued to move out of the oil and gas pipeline industry's largest exchange-traded fund during September amid concerns about transportation bottlenecks and a November ballot initiative in Colorado that threatens to limit future production in the state.
The Alerian Master Limited Partnership ETF, which is based on the Alerian MLP Index, saw $76.5 million in net outflows for the month. Net outflows totaled about $168.6 million in August. The Alerian index dropped -1.6% on a total-return basis, which includes distribution income, in August after it rose 1.6% the previous month. Publicly traded master limited partnerships, which are not taxed at a corporate level, pay relatively high quarterly distributions and are used to house many U.S. oil and gas pipeline assets.
Midstream partnerships such as Noble Midstream Partners LP and Western Gas Partners LP that have exposure to Colorado shale basins in particular saw their stock prices decline after Proposition 112, which would require any new oil and gas development to take place at least 2,500 feet from occupied structures or other designated buildings, qualified for the Colorado ballot at the end of August. Even though pipeline companies are largely insulated from drilling slumps by long-term contracts that provide guaranteed revenue, MLPs in the state own substantial gathering and processing infrastructure that can depend on acreage dedication by producers.
As oil and gas producers wait for the crunch in takeaway capacity out of the Permian Basin to ease, NGL players are also eyeing short-term transportation and processing constraints. Spiking prices are driving improved financial results for NGL heavyweights such as Enterprise Products Partners LP and ONEOK Inc., but rising volumes also mean those companies are forced to reject more ethane.
One bright spot for the midstream MLP space in September was Dominion Energy Inc.'s Sept. 19 decision to roll up Dominion Energy Midstream Partners LP The Federal Energy Regulatory Commission's March 15 decision to extinguish a key tax benefit for oil and gas MLPs had sent the partnership's share price into a tailspin from which it could not recover, plummeting 28.9% between the stock market's March 15 and Sept. 19 closings, and had prompted the combination.
While Dominion Midstream will no longer drag on the Alerian index once the transaction is complete, the pipeline sector still has a long road ahead when it comes to equity value recovery.
"Things look a lot better than they did a year ago, but so much dilution has happened and so many investors have gotten burned that it's just a long way back," CBRE Clarion Securities analyst Hinds Howard, who specializes in MLPs, said in an interview. "So much value destruction has happened, the math is just hard to get back to par."
Investors were more confident in a dozen broader energy ETFs tracked by S&P Global Market Intelligence, which saw $155.5 million in net inflows in September. The spot price of West Texas Intermediate crude oil rose 5% from the end of August to the end of September to settle at $73.25 per barrel.