STEELPATH MLP ALPHA FUND

Transcription

1 STEELPATH MLP ALPHA FUND 3Q 2017 COMMENTARY AS OF 9/30/17 Ticker Symbol MLPAX (Class A shares) MLPOX (Class Y shares) OSPAX (Class I shares) Asset Class Master Limited Partnership (MLP) Oppenheimer SteelPath MLP Alpha Fund Class A, Y and I Shares Average Annual Total Returns as of 9/30/17 3Q17 1-Year 3-Year 5-Year Since Inception Portfolio Managers Stuart Cartner Since 3/2010 Oppenheimer SteelPath MLP Alpha Fund (Class A shares without sales charge) Oppenheimer SteelPath MLP Alpha Fund (Class A shares with sales charge) Oppenheimer SteelPath MLP Alpha Fund (Class Y shares) -1.57% -2.65% -8.62% 1.66% 4.33% Brian Watson, CFA Since 3/2010 Client Portfolio Managers Chuck Anderson Chad Potter, CFA Oppenheimer SteelPath MLP Alpha Fund (Class I shares) Alerian MLP Index Total Return (AMZ) S&P 500 Index Morningstar Energy Limited Partnership Category Average Average Industry Experience 25 years Morningstar Percentile Rank and Ranking: Energy Limited Partnership Category Class A shares based on Total Return 4 57% 59/111 34% 28/84 Returns for periods of less than one year are cumulative and not annualized. 39% 15/38 45% 5/10 Annual Expense Ratios: Class A Shares: Gross: 4.18, Net: 4.07, Net expense net of deferred Income tax expense: 1.53 Class Y Shares: Gross: 3.93, Net: 3.82, Net expense net of deferred income tax expense: 1.28 Class I Shares: Gross: 3.72, Net: 3.72, Net expense net of deferred income tax expense: 1.18 The performance data quoted represents past performance, which does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor s shares, when redeemed, may be worth more or less than the original cost. Current performance and expense ratios may be lower or higher than the data quoted. For performance data current to the most recent month-end, visit oppenheimerfunds.com or call CALL OPP ( ). Fund returns include changes in net asset value with dividends and capital gains reinvested. Class A and Y shares were launched 3/31/10. Class I shares were launched 6/28/13. Class A shares include the 5.75% maximum sales charge where indicated. Class Y and I shares are not subject to a sales charge. Returns do not consider capital gains or income taxes on an individual's investment. Generally, I shares are only available to institutional investors and can only be purchased with a $1million initial investment. Y shares are not available to all investors. See prospectus for details. The net expense ratio reflects that the Advisor has contractually agreed to limit fees and/or reimburse expenses (excluding certain expenses) until at least 3/30/18, however, the Fund s Board of Trustees may terminate or amend this arrangement prior to that date. The Manager can be reimbursed by the Fund within three years after the date the limitation an/or expense reimbursement has been made by the Manager, provided that such repayment does not cause the expenses of any class of the Fund to exceed the limits described in the notes to the fee table in the prospectus. The net expense ratio is also net of deferred income tax expense, if applicable, which represents an estimate of the Fund s potential tax liability. This expense may vary from year to year. Because the Fund's deferred income tax expense is excluded from the expense cap, the Fund's net expense is increased by the amount of this expense. A change in the estimate of deferred tax liability could result in a loss to net asset value. The majority of distributions have been classified as return of capital which reduces the investor s adjusted cost basis. See the prospectus for details. OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity. Not FDIC Insured May Lose Value Not Bank Guaranteed

2 Market Overview For the third quarter of 2017, master limited partnerships (MLPs), as measured by the Alerian MLP Index (AMZ), were down 4.8% on a price basis and generated a 3.0% total return loss, or including the impact of distributions. As measured by the Alerian MLP Infrastructure Index (AMZI), a more concentrated measure of midstream MLPs, the sector lost 5.9% on a price basis and 4.2% on a total return basis. For context, the broader market, as measured by the S&P 500, gained 4.0% on a price basis and 4.5% on a total return basis. The price of crude oil continued to exert undue influence on midstream, or energy infrastructure, equities over the period. While midstream stocks were, on average, mostly flat over July and September, an August pullback in crude from $50 per barrel to $46 per barrel weighed heavily on midstream equities. Despite a full recovery in crude oil prices, midstream equities frustratingly remain below July levels. Hurricane Harvey produced an extraordinary amount of flooding mid-quarter, but little wind or storm surge related damage to midstream infrastructure, and thus only transitory disruptions with insignificant sustainable impact upon midstream operators. Midstream subsectors experienced variable performance over the reporting period. On average, the Propane and Marine subsectors provided the best performance over the quarter, each of which had underperformed year-todate. Conversely, the Natural Gas Pipelines and Diversified subsectors generated the weakest returns after exhibiting outperformance earlier in the year. Second quarter midstream operating performance was reported during the period and was, on average, slightly below expectations with EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, coming in 0.7% lower than consensus estimates, 0.1% higher than the first quarter of 2017 and 10% higher than the year ago period. Midstream entities announced 30 distribution increases, one reduction, and 40 that were unchanged from the first quarter. Approximately $5.2 billion of new midstream equity was issued over the quarter via marketed transactions, including one initial public offering, and we estimate an additional $2.0 to $3.0 billion was issued through at-themarket programs in which primary units trade into the market anonymously throughout the normal trading day. We estimate MLP-focused investment vehicles, including closed-end funds, open-end funds and index-linked products, experienced approximately $1.5 billion of inflows over the quarter. This imbalance of visible equity supply and demand likely partially contributed to the sector s relatively weak performance over the period. MLP capital investment over the quarter included approximately $6.2 billion of announced asset acquisitions and we estimate $6 to $7 billion of organic capital spending. New midstream project opportunities to alleviate localized capacity constraints, meet demand from new industrial capacity, and to fulfill export demand remain abundant, particularly in premier basins such as the Permian, Midcontinent, and Appalachia as well as Gulf Coast port, refinery, and petrochemical facilities. West Texas Intermediate (WTI) crude oil priced at the Cushing hub ended the quarter at $51.67 per barrel, up 12% from the end of the second quarter and 7% higher than the year-ago period. The spread between Brent crude, a proxy for international crude prices, and WTI ended the quarter close to $6 per barrel, widening from recent normalized levels of $1 to $3 per barrel. While the Brent-WTI spread is wider than normal, it is similar in magnitude to the spread between crude oil priced along the U.S. Gulf Coast and WTI. Importantly, this inland differential provides an arbitrage opportunity for industry participants with midstream capacity from inland basins to the Gulf Coast and is supportive for midstream providers seeking to contract new capacity, principally from the Permian basin. Henry Hub natural gas spot prices ended the quarter at $2.89 per million British thermal units (MMbtu), down 2% from the end of the second quarter and 2% lower than the year ago period. Natural gas priced in certain areas of Appalachia continued to widen relative to benchmark pricing over the period as delays to the full start-up of the Rover pipeline has impacted available basin takeaway capacity amidst the seasonally weakest part of the year for Appalachian pricing. For example, natural gas pricing near Leidy, PA exited the quarter at approximately $0.76 per MMbtu, a 74% discount to Henry Hub. Natural gas prices in the Permian basin (Waha) also ended the quarter at a wider-than-normal basis spread highlighting the need for additional midstream capacity out of the basin. Natural gas liquids (NGL) priced at Mont Belvieu ended the quarter at $31.27 per barrel, up 36% from the end of the second quarter and 39% higher than the year-ago period. Propane and butane pricing exhibited the strongest performance, up 52% and 48% over the quarter, respectively, but price strength was visible in all of the purity products driven by export volumes and impacts from Hurricane Harvey related outages. Frac spreads, a measure of natural gas processing economics, 2

3 strengthened substantially over the quarter to settle at $0.49 per gallon, up 71% from the end of the second quarter and 72% higher than the year-ago period. Generally, the greater the frac spread, the greater the incentive for producers to seek natural gas processing capacity. The backwardated structure (in which future prices are lower than near-term prices) of the crude oil futures curve returned during the period as near term pricing rose sharply while longer-dated prices declined. The near-tomedium term backwardation of the natural gas futures curve held relatively firm over the period though longerdated prices declined. Generally, for any commodity, a backwardated futures market acts to deter storage by removing the ability for traders to purchase and store the commodity today to sell at a higher hedged price in the future. Generally, providers of storage services prefer a contango market (in which future prices are higher than near-term prices) and, therefore, market structure over the period shifted to being moderately negative for contracting available crude storage, while remaining generally unfavorable for longer-term natural gas storage. Please note, though we routinely review the pricing environments for the major energy commodities in our commentaries, we do so primarily to provide investors a more nuanced understanding of the broader energy markets. However, we choose to seek to exploit the logistical needs surrounding these products primarily through energy infrastructure MLPs that we believe are not overly exposed to changes in these prices. Over the quarter, the ten-year U.S. Treasury Bond yield increased by three basis points to end the period at 2.33%. The MLP yield spread at quarter-end, as measured by the implied yield of the AMZ index relative to the 10-year Treasury, widened by 33 basis points to 5.33%. The long-term average (2000-3Q2017) spread is 3.59%, which continues to suggest that 10-year treasury rates could increase materially before this spread approached its historical average. At period-end, the AMZ s indicated yield was 7.66%. Over the third quarter of 2017, REITs and utilities posted total returns of 0.9% and 3.2%, respectively, versus the AMZ s 3.0% loss. Price stability for these yield-oriented sectors likely reflects the unchanged interest rate environment over the period. Although MLPs are often associated with interest rates, given the yield-oriented return component, the energy market weakness over the period exerted a stronger influence on midstream equities. In observing the sector s underlying business drivers, we believe midstream operators are set to benefit from several tailwinds rather than headwinds. Out of the extreme energy industry turbulence that reflected the cyclical break in oil prices that began in late 2014, a new normal appears to have emerged. In this new-normal environment, crude oil prices are likely to stay significantly below pre-break levels but U.S. shale producers appear capable of delivering moderate production growth nonetheless. As such, we see midstream assets benefiting from a durable period of volumes growth. Further, the massive, and expensive, build out of pipelines and other infrastructure needed to accommodate the new shale production basins also appears to be nearing completion. As a result, we believe many midstream operators sit in the enviable position of being able to flow growing volumes through existing assets rather than having to fund large capital spending budgets to build new capacity. Therefore, as the energy markets continue to normalize, the midstream sector appears poised to offer visible business growth at attractive valuations. 3

4 Performance Attribution The most significant contributors from third quarter performance included: 1. Tallgrass Energy GP LP (NYSE: TEGP) Contribution: 0.64% 5 TEGP units outperformed over the period as its daughter MLP, Tallgrass Energy Partners (NYSE: TEP), continued to take strategic actions that are expected to optimize its existing asset base. For example, during the period TEP executed contracts for additional volumes on the Rockies Express pipeline, announced a pipeline project to connect natural gas produced in the Denver-Julesburg basin to the Rockies Express pipeline, and announced new refinery connections for the Pony Express crude pipeline. 2. Targa Resources Corp. (NYSE: TRGP) Contribution: 0.50% 5 TRGP shares outperformed over the period likely reflecting investor value hunting after underperforming earlier in the year and as the frac spread, a measure of natural gas processing economics, improved during the quarter. We believe TRGP s premier position in the Permian basin and Gulf Coast provides one of the best opportunity sets in the gathering and processing subsector. 3. MPLX LP (NYSE: MLPX) Contribution: 0.46% 5 MPLX units outperformed over the period as the company and its sponsor, Marathon Petroleum (NYSE: MPC), advanced their ongoing dropdown and incentive distribution rights ( IDR ) restructuring plan. Specifically, MPLX acquired a 25% interest in the Explorer Pipeline, a 35% interest in the Southern Access Extension Pipeline, and a 41% interest in the Louisiana Offshore Oil Port from MPC for $1.1 billion. MPC holds midstream assets with an additional $1 billion of annualized EBITDA that are expected to be dropped to MPLX during The most significant detractors from third quarter performance included: 1. Energy Transfer Partners LP (NYSE: ETP) Contribution: -0.88% 5 ETP underperformed over the period as market participants continue to adjust portfolio weightings following its merger with Sunoco Logistics and ahead of the partnership s reduced weighting in the AMZ resulting from Alerian s updated index methodology. ETP expects to target near term distribution growth in the low double digits while maintaining coverage in excess of 1.0x. With several multi-billion dollar projects expected to enter service in the latter half of 2017 and early 2018, we believe ETP is well positioned to deliver on its projections. 2. Plains All American Pipeline LP (NYSE: PAA) Contribution: -0.52% 5 Plains units underperformed over the quarter as headwinds in its Supply & Logistics segment resulted in quarterly operational performance that was below market expectations. Despite continued headwinds, Plains is expecting improvement in fee-based volumes and margins during the fourth quarter of 2017 and into With its significant asset footprint in the Permian basin, Plains will be one of the primary beneficiaries of continued production growth in the basin. 3. Genesis Energy LP (NYSE: GEL) Contribution: -0.33% 5 GEL units underperformed over the period on negative investor sentiment related to the acquisition of the tronabased exploration and production businesses of Tronox Limited. Although the acquisition was accretive to distributable cash flow per unit and GEL s leverage, the assets acquired were not traditional midstream assets and not well understood by MLP investors. We expect improving sequential quarterly results as new projects recently placed into service demonstrate increased utilization and contribute to operating results. Additionally, the newly acquired trona business, while not a traditional midstream asset, brings a very stable margin profile that is expected to generate consistent future cash flows. 4

5 Yields by Asset Class 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 7.67% 4.12% 3.70% 3.39% 1.94% 2.33% 0.00% AMZ REITs BBB Utilities S&P Yr Treasury Source: Bloomberg. Data as of September 30, 2017 and is calculated using the most recent annualized distribution. MLPs are represented by the AMZ. Real Estate Investment Trusts (REITs) are represented by the FTSE NAREIT Equity REIT Index. BBB Bonds (BBB) are represented by the U.S. Corporate Bond BBB yield. Utilities are represented by the Dow Jones Utilities Index. 10-Year Treasuries are represented by the U.S. Treasury Bond 10-year yield. S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks listed on various exchanges. Past performance does not guarantee future results. Top Ten Holdings by Issuer 5 3rd Quarter 2017 (as of 9/30/17) Energy Transfer Partners LP 9.8% Energy Transfer Equity LP 8.7 Enterprise Products Partners LP 8.1 TC Pipelines LP 7.0 Targa Resources Corp. 6.9 MPLX LP 6.7 Buckeye Partners LP 6.6 Magellan Midstream Partners LP 6.5 Tallgrass Energy GP LP 4.8 Williams Partners LP 4.7 Sector Attribution Analysis 5 3rd Quarter 2017 (as of 9/30/17) MLP Alpha Fund Alerian MLP Index Attribution Analysis Average Weight Return Contribution to Return Average Weight Return Contribution to Return Sector Allocation Stock Selection Total Effect Coal Diversified Gathering & Processing Natural Gas Pipelines Other Petroleum Transportation Propane Shipping Cash Totals Contribution to return is based on absolute stock performance in the portfolio. Attribution methodology notes: The analysis includes equity investments only and provides analysis of the effects of several portfolio management decisions, including allocation and security selection. All attribution effects are computed daily, linked through time, and do not reflect fees, expenses or transaction costs. The total returns displayed for the Fund and Benchmark do not capture the effect of daily cash flows and intra-day trading activity, and may be further impacted by pricing differentials, therefore they are subject to reasonable variance from the Fund s and the Benchmark s actual return. Past performance does not guarantee future results. 5

6 Sector Commentary The MLP space, as measured by the Alerian MLP Index (AMZ), lagged crude oil prices during the quarter, with the AMZ ending the period down 4.8% while the West Texas Intermediate oil contract rose 10.5%. The decline in the AMZ can largely be attributed to the underperformance of a handful of large cap constituents (NYSE: PAA, NYSE: ETP, NYSE: BPL), as the equal-weighted MLP universe was flat for the quarter. Outperformers Propane partnerships reversed last quarter s poor performance, outperforming the rest of the group in 2Q. The subsector s outperformance likely reflects investor value seeking in the oversold subsector in front of the onset of winter weather that can act as a catalyst to these weather-sensitive businesses. Refining partnerships continued to perform well, following refining crack spreads which elevated above seasonal norms. Drawing inventories and weather-related logistical congestion were behind the move higher in refining profitability. Underperformers Petroleum Pipelines partnerships were the biggest underperformers during the period. Led by PAA s decision to further reduce the partnership s distribution, investors began to reduce exposure to several partnerships in the group that have perceived risk, particularly around balance sheet leverage and equity issuance needs. Natural Gas Pipelines partnerships were down for the quarter, although performance was mixed across the group. The negative group performance can be attributed to idiosyncratic factors for a couple of partnerships (NYSE: ETP, NYSE: BWP) and generalized investor aversion to any perceived risks. 6

7 SPECIAL RISKS Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. The Fund s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. MLPs are subject to significant regulation and may be adversely affected by changes in the regulatory environment including the risk that an MLP could lose its tax status as a partnership. Additional management fees and other expenses are associated with investing in MLP funds. The Fund is subject to certain MLP tax risks. An investment in the Fund does not offer the same tax benefits of a direct investment in an MLP. The Fund is organized as a Subchapter C Corporation and is subject to U.S. federal income tax on taxable income at the corporate tax rate (currently as high as 35%) as well as state and local income taxes. The potential tax benefit of investing in MLPs depend on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation, its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution which could result in a reduction of the fund s value. MLP funds may accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability, if applicable, is reflected in the daily NAV and as a result a MLP fund's aftertax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. The Fund is classified as a non-diversified fund and may invest a greater portion of its assets in the securities of a single issuer. 7

8 DISCLOSURES Past performance does not guarantee future results. 1. The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. Index performance is shown for illustrative purposes and does not predict or depict performance of the fund. The index is unmanaged and cannot be purchased directly by investors. 2. The S&P 500 Index is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. Index includes reinvestment of dividends but does not include fees, expenses or taxes. Index performance is shown for illustrative purposes and does not predict or depict performance of the fund. The index is unmanaged and cannot be purchased directly by investors. 3. Source: Morningstar, Inc. 9/30/2017. The Morningstar Energy Limited Partnership Category Average is the average return of the mutual funds within the investment category as defined by Morningstar. Returns include the reinvestment of distributions but do not consider sales charges. The Morningstar Energy Limited Partnership Category Average is shown for illustrative purposes only and does not predict or depict the performance of the Fund. 4. Source: Morningstar, Inc., as of 9/30/2017. Morningstar ranking is for Class A shares and ranking may include more than one share class of funds in the category, including other share classes of this Fund. Ranking is based on total return as of 9/30/2017, without considering sales charges. Different share classes may have different expenses and performance characteristics. Fund rankings are subject to change monthly. The Fund s total-return percentile rank is relative to all funds that are in the Energy Limited Partnership category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top performing fund in a category will always receive a rank of Holdings, sector and country allocations are subject to change, do not constitute recommendations by OFI SteelPath, Inc., and are dollar-weighted based on assets. Attribution analysis is a process used to analyze the absolute return (often called contribution) and the excess return (often called relative return) between a portfolio and its benchmark. The total effect measures both the allocation effect to a sector as well as stock selection within a sector. Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested. These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the close of business on September 30, 2017, and are subject to change based on subsequent developments. The Fund s portfolio and strategies are subject to change. Total returns do not show the effects of income taxes on an individual s investment. Taxes may reduce an investor s actual investment returns on income or gains paid by the Fund or any gains realized if the investor sells his/her shares. This material is provided for general and educational purposes only, is not intended to provide legal or tax advice, and is not for use to avoid penalties that may be imposed under U.S. federal tax laws. OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity. Contact your attorney or other advisor regarding your specific legal, investment or tax situation. Before investing in any of the Oppenheimer funds, investors should carefully consider a fund s investment objectives, risks, charges, and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting oppenheimerfunds.com or calling CALL OPP ( ). Read prospectuses and summary prospectuses carefully before investing. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY OppenheimerFunds Distributor, Inc. All rights reserved. CO October 12,