A weekly recap of SNL Energy'scoverage of major themes in the natural gas industry.
TheU.S. oil and gas industry is showing signs of regaining strength despitelonger-term market uncertainties.
TheUnited Kingdom's departurefrom the EU, which has caused waves of market doubt, is likely to hold some forthe U.S. midstream sector, whose dividend performance attracts yield-focusedinvestors if interest rates stay low.
Elevatedlevels of post-Brexit uncertainty will keep the federal funds rate down, saidTortoise Capital Advisors LLC Managing Director Rob Thummel. "It will behard for … the Fed to raise interest rates. In this environment of prolongedlow interest rates, a lot of MLPs like [Enterprise Products Partners LP] will grow theirdividends by 5% to 7%," he said.
TheAlerian MLP index's yield spread against the 10-year Treasury was about 687basis points as of March 31, compared to a historical 10-year yield spread of 371basis points, according to data from Alerian.
"Investorslook at the spread between MLP yield and the 10-year Treasury, and that spreadis very wide. MLP yields could go lower as [post-Brexit] is an attractiveenvironment," said Poe Fratt, an MLP analyst at D.A. Davidson & Co.,expressing his optimism about investment-grade operators such as Enterprise,Magellan Midstream Partners LPand Genesis Energy LPto attract more equity investments.
Tortoisehas said it aims to buy more equity holdings in MLPs with gas-gathering systemsand crude pipes as the pace of industry recovery improves.
Thecurrency impact of the June 23 Brexit vote was swift and significant, boostingthe dollar. By June 28, the British pound tanked by about 10% against thedollar from its June 23 closing price, reaching a 31-year low. The euro fellabout 3% by the end of June 27.
"Tothe extent Europe has a disruption in trade and economic activity is retarded,capital will seek the strength of the U.S. and the dollar. As the dollarstrengthens, oil prices will weaken," said Timothy Murray, managingdirector and head of energy origination at Providence Equity Partners LLC'salternative investments arm, Benefit Street Partners.
However,the possibility of a sustained depression in crude prices is not necessarilydeterring energy investors across the pond.
PhilipRacusin — who runs EnergyFunders LLC, a crowdfunding platform that facilitatesU.S. oil and gas investments — said he met with a European executive looking toexpand in U.S. oil and gas operations.
"Thesimple fact that he was here explains European interest," Racusin said. "Brexitis increasing capital inflows into the U.S. [oil and gas sector]."
Moody'soil and gas Liquidity Stress Index, or LSI, declined to 25.7% in June from 26.8% in May, Senior VicePresident John Puchalla and colleagues said in a July 1 note. In June, twoenergy sectors, as well as utilities and transportation services, were the onlysectors above 10%.
"[T]heLSI has been steadily improving since we concluded an extensive energy sectorratings review in March, which triggered a rash of downgrades and caused theLSI to surge," the analysts wrote.
Ofthe 10 speculative-grade issuers upgraded in June, four were energy-relatedcompanies, Puchalla and his team said in their report.
moved up a notch to SGL-3 after it suspended its master limited partnership'scash distributions to SouthcrossHoldings LP. Southcross Holdings emerged from bankruptcy protection in April with acourt-approved reorganization plan. Only one energy issuer, theoil-field-services company SeitelInc., was downgraded in June.
Oiland gas liquidity stress "is still very high in absolute terms, but it hasdeclined over three months," Puchalla said in an interview. "Thenumber of downgrades in the energy sector has gone down. Unless [oil] pricesare going to decline again, the level of [ratings] activity would probablyslow."
Meanwhile,inflows to energy exchange-traded funds saw a to $279.3 million inJune, compared to $57.5 million in May, according to FactSet data.
"Itappears that investors are getting more comfortable with the stability of oilprices and improved prospects for large-cap energy companies in terms ofincreased stock valuations," Todd Rosenbluth, S&P Global MarketIntelligence's head of ETFs and mutual funds research, said in an interview.
TheEnergy Select Sector SPDR Fund swung to an influx of $81.0 million in Juneafter net outflows of$58.0 million in May.
Moreinvestors also bought shares in the Alerian MLP ETF, which pulled in $59.3million in June, compared to $5.7 million in May.
Magellanand Enterprise are the top two of 26 midstream names in the Alerian MLP ETF asof July 6, with Magellan carrying a 10.28% weight and Enterprise 10.04%.
Anotherenergy ETF winner in June was the First Trust North American EnergyInfrastructure Fund, whose net inflows climbed 22% from May. FactSet datarevealed that it garnered $42.2 million in June, compared to $34.5 million inMay. The fund's top 10 holdings include Kinder Morgan Inc., TransCanada Corp., Enbridge Energy Management LLC and Enterprise.
Asmarket skepticism wanes, ETFs that own stocks of midstream master limitedpartnerships could stand to gain. Rosenbluth said more money will flow in if investorssee greater stability in MLPs' dividend payouts. "MLP ETFs offer a greaterincome component for investors. So investors are more sensitive to MLP dividendpayments, compared to diversified ETFs," he said.