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Funds flow from key pipeline ETF despite 'tailwind' from merger, Q2 results

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Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

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Funds flow from key pipeline ETF despite 'tailwind' from merger, Q2 results

A nearly sectorwide upswing in financial results and news of a major corporate consolidation were not enough to keep money from moving out of the oil and gas pipeline industry's largest exchange-traded fund during August.

Net outflows from the Alerian Master Limited Partnership ETF, which is based on the Alerian MLP Index, totaled about $168.6 million for the month after the fund saw nearly $618.9 million in net outflows in July, according to S&P Global Market Intelligence data. The Alerian index rose 1.6% on a total-return basis, which includes distribution income, in August after climbing 6.6% 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.

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In contrast to the Alerian ETF's net outflows, many pipeline companies and partnerships recorded what Robert W. Baird & Co. Inc. midstream energy analyst Ethan Bellamy called "upside surprises" during the second-quarter earnings season that straddled July and August. A selection of 10 large North American oil and gas transport firms saw three with year-over-year decreases in adjusted EBITDA or distributable cash flow, while five reported double-digit-percentage increases in both metrics.

The beginning of August also brought the announcement of Energy Transfer Equity LP's $26.55 billion stock deal to buy out Energy Transfer Partners LP. The highly anticipated combination ended Energy Transfer Partners' reign as the last large-scale MLP to make required cash payments to its general partner, which is owned by Energy Transfer Equity. These payouts, called incentive distribution rights, handicap limited partners' access to capital for reinvesting in the business. They can total 50% of a partnership's incremental quarterly cash distributions and take a heavy toll on share prices.

Some industry observers think the Energy Transfer deal could be the shot in the arm that struggling pipeline MLP valuations need. Bellamy called the transaction a "much-needed tailwind for the midstream space," while CBRE Clarion Securities analyst Hinds Howard, who specializes in MLPs, commented that it could "clear the way for more enthusiastic interest in midstream."

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Investors also continued to pull back from a dozen broader energy ETFs tracked by S&P Global Market Intelligence, with $911 million in net outflows in August after $223 million in July outflows. The spot price of West Texas Intermediate crude oil rose 1.5% from the end of July to the end of August, to settle at $69.80 per barrel.

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