Midstream MLPs: A Prospect for Growth & Income

Transcription

1 Midstream MLPs: A Prospect for Growth & Income Charles Anderson, VP Sr Client Portfolio Manager 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.. This material has been prepared by OppenheimerFunds Distributor, Inc. for institutional investors only. It has not been filed with FINRA, may not be reproduced and may not be shown to, quoted to or used with retail investors. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc., 225 Liberty Street, New York, NY OppenheimerFunds Distributor, Inc. All rights reserved. Not For Use with Retail Investors

2 Supply Chain for Energy Products Upstream Midstream Downstream Crude oil and natural gas production Transportation and logistics Refining and distribution Drilling Pipelines Oil Refineries Production Terminals Natural Gas Distribution Offshore Marine Transportation Retail Outlets Midstream Services Toll Road Business Model Historical Income Generator Thematic Opportunities Midstream MLPs collect revenue based on the transportation of commodities between producers and consumers Compelling historical yields and distribution growth potential* Opportunistic investment in the infrastructure required to support the U.S. energy renaissance * Past performance does not guarantee future results. Based on the historical performance of the companies in the MLP sector. 2

3 The MLP Value Chain Fees collected at multiple links along chain Source: EnLink Midstream 3

4 Return and Risk Statistics of MLPs and Other Asset Classes Total Return Annualized Return Current Distribution 1 Correlation to: MLPs 2 Oil 3 Natural Gas 4 Sharpe Ratio 5 MLPs 117% 8.0% 7.1% % REITS Utilities Russell Fixed Income Dow Jones NASDAQ S&P Standard Deviation Source: Bloomberg. December 2006 December Current distribution reflects the current distribution/dividend rates (latest annualized quarterly rate). 2. As represented by the Alerian MLP Index. 3. As represented by WTI benchmark in Cushing, Oklahoma. 4. As represented by Henry Hub benchmark. 5. Sharpe Ratio is a ratio of performance to risks. Master Limited Partnerships (MLPs) are represented by the Alerian Index, a float-adjusted, capitalization-weighted index, whose constituents represent approximately 85% of total float-adjusted market capitalization. Real Estate Investment Trusts (REITS) are represented by FTSE NAREIT Equity REIT Index. Utilities are represented by the Dow Jones Utilities Index. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. Fixed Income is represented by Barclays Aggregate Bond Index. The Dow Jones Index is a price-weighted measure of 30 U.S. blue-chip companies. The NASDAQ is a market-capitalization weighted index of the more than 3,000 common equities listed on its stock exchange. The S&P 500 Index is an unmanaged capitalization-weighted index (weighted by the market value of the companies) of 500 stocks listed on various exchanges. Returns quoted above are not the returns of the Oppenheimer SteelPath Funds. Indices do not include fees or operating expenses and are not available for actual investment. Indices presented are representative of various broad-based asset classes. They are unmanaged and shown for illustrative purposes only. An investor cannot invest directly in an index. Past performance does not guarantee future results. Please refer to the appendix for index definitions. 4

5 Rising Interest Rates and MLPs MLPs have shown resilience in rising interest rate environments AMZX +5% AMZX -3% AMZX -4% AMZX +54% AMZX +30% AMZX +11%AMZX +10% AMZX -3% AMZX -4% bps +248 bps +110 bps +212 bps +178 bps +134 bps +154 bps +71 bps +123 bps MLP Units Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Rising Rates AMZX (Total Return of the AMZ Index) Source: Bloomberg as of 12/30/2016. Rates are 10-Year Treasury. The Alerian MLP Index (AMZ or AMZX) is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization. Past performance does not guarantee future results. 5

6 MLP Correlation to Commodity Prices Source: Bloomberg December 30, Crude represents WTI and Natural Gas represents Henry Hub Pricing 6 Jul-15 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Rolling 1-year Correlation of 1-Month Price Change Crude Nat Gas

7 Correlation Midstream MLPs fundamentals historically have been stable and even growing despite the price of crude oil 120 $ $100 EBITDA Growth (Index) $80 $60 $40 Price of oil 70 $20 60 $0 EBITDA WTI EBITDA is represented by the average EBITDA growth adjusted for M&A transactions of the top five constituents of the Alerian MLP Infrastructure Index as of 9/30/16. 7

8 Growth of Income Distributions Distributions have grown steadily for over a decade $40 $35 $30 Total Distribution/Share $25 $20 $15 $10 $5 $ Distribution Indexed - 7% CAGR Price Indexed - 5% CAGR As defined by the Alerian MLP Index (AMZ). Compound Annual Growth Rate (CAGR) is the year-over-year growth rate of an investment over a specified period of time. Source: Bloomberg; Company Filings; For the time period January 1996 December Past performance does not guarantee future results. 8

9 Selected MLP Historical Price Corrections Peak Date 4/1/04 7/13/07 4/29/11 2/24/12 8/29/14 Trough Date 5/10/04 11/21/08 8/8/11 6/4/12 2/11/16 Returns (16%) (55%) (19%) (14%) (62%) Price Recovery: 6-Months 22% 42% 26% 12% 54% 12-Months 32% 72% 24% 26%??? Source: Alerian as of 12/30/2016. Past performance does not guarantee future results. 9

10 Attractive Valuations (Price / Forward DCF) MLP valuations decreased during the last down cycle increasing the appeal of the asset class 30x 25x 20x 15x 10x Median Median Alpha Select 40 Income Highest Middle (25%-75%) quartile range Lowest 5x 0x CAPIQ as of 12/5/16. Based on AMZI constituents as of most recent rebalancing in September

11 World Oil Supply/Demand Balance 3.0 Actual Projected Oil Over/(Under) Supply (Millions of barrels per day) (1.0) (2.0) Over Supply Under Supply (3.0) Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 IHS EIA BofA GS Avg w/ OPEC cut, low Avg w/ OPEC cut, high 11

12 Call on North American Oil will be Significant Global Oil Supply and Demand Balance Waterfall 85.0 Call on US shale oil through ~5 million Bbls/day ~8 million Bbls/day Assumes 3% net decline rate per year Projects already in progress Incremental supply gap from 4% net decline rate Current Oil Supply Net Decline Rate Non-OPEC Fields Under Source: EIA, DNB, Barclays, GS Development OPEC Spare Capacity Required New Short-Cycle Supply to Balance 2020 Oil Demand Required New Supply to Balance (4% Decline Rate) Source: EIA, DNB Markets, Barclays, Goldman Sachs. 12

13 US Amongst Most Cost Competitive Oil Supply Sources Global Oil Supply Cost Curve North America oil supply potential is both large and low cost Source: IHS. 13

14 U.S. Natural Gas Pipeline Exports to Mexico Billion Cubic Feet (Bcf) Some MLPs with future projects: 1. Roadrunner Pipeline (Oneok, NYSE: OKE) Estimated in service date Q Trans Pecos Pipeline (Energy Transfer Partners, NYSE: ETP) Estimated in service date Q Comanche Trail Pipeline (Energy Transfer Partners, NYSE: ETP) Estimated in service date Q Valley Crossing (Spectra Energy Corp, NYSE: SE) Estimated in service date Q Sur de Texas-Tuxpan (TransCanada, NYSE: TRP) Estimated in service date Q Source: EIA, IHS Estimates 14

15 U.S. Liquefied Petroleum Gas (LPG) Exports Thousands of barrels 450, , , , , , , ,000 50, Projected Infrastructure companies that facilitate NGL exports: Targa Resources Corp: ~6.5-7mmbl/month capacity LPG export terminal Enterprise Products Partners: 9mmbl/month LPG export terminal. New ethane export facility by 3Q2016 Sunoco Logistics Partners/Energy Transfer Partners: Mariner South LPG export facility has capacity of 6 mmbl/month plus storage capacity of 1 mmbls Source: EIA, Bentek estimates 15

16 Investment Process Evaluating MLPs for limited downside risk and distribution security MLP Universe 130+ MLPs Research Investable Universe ~120 MLPs Holistic Fit Investment Committee Ongoing Monitoring and Due Diligence 16

17 OFI SteelPath Investment Suite Oppenheimer SteelPath MLP Mutual Funds Share Class Ticker Symbols Targeted Distribution Frequency Strategy MLP Alpha Fund A Y C I MLPAX MLPOX MLPGX OSPAX Monthly Concentrated portfolio of ~30 MLPs Total return focus Seeks MLPs with best total return potential MLP Alpha Plus Fund A Y C I MLPLX MLPNX MLPMX OSPPX Monthly Concentrated portfolio of ~30 MLPs Total return focus Strategic leverage of ~25%, monitored daily to enhance total return potential MLP Income Fund A Y C I MLPDX MLPZX MLPRX OSPMX Monthly Concentrated portfolio of ~30 high-yielding MLPs Historically highest distribution paying Oppenheimer SteelPath Fund MLP Select 40 Fund A Y C I MLPFX MLPTX MLPEX OSPSX MLPYX Monthly Diversified portfolio of a minimum of 40 MLPs Blend of growth and income oriented MLPs 5% maximum position size 17

18 Deferred Taxes C-Corp funds are liable for entity level taxes on income and capital gains Taxes are at a C-Corp rate (currently 35% federal; estimated 1.8% state) Very little cash/current taxes: Majority of tax is deferred (deferred income/roc) because of depreciation shield and unrealized gains Fund must account for all taxes (current and deferred) every day Reflected in NAV: Taxes are applicable only to shareholder s specific holding period Up Market Example Down Market Example 1.200% 1.000% 1.000% 0.000% % 0.800% 0.600% 0.400% 0.200% 0.000% 0.625% % % % % % % % NAV Price Change of MLP Mutual Fund NAV Price Change of MLP Mutual Fund Price Change of Underlying MLPs in Fund Price Change of Underlying MLPs in Fund 18

19 Mutual Fund Risk / Return Attractive alternative investment Alpha Fund, Class A Shares (without load) Alpha Plus Fund, Class A Shares (without load) Income Fund, Class A Shares (without load) Select 40 Fund, Class A Shares (without load) 3-Year Annualized Return 5-Year Annualized Return Fiscal Year Turnover Standard Deviation 1 Sharpe Ratio 2 Correlation S&P Correlation Fixed Income 3, % 3.76% 36% 17.80% 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 may be lower or higher than the performance data quoted. For performance data current to the most recent month-end, visit oppenheimerfunds.com or call CALL.OPP ( ). Fund returns quoted above are for Class A shares and include changes in share price and reinvested distributions, but not the maximum sales charge applicable to Class A shares. If the sales charge was considered, performance quoted above for Class A shares would be lower. The following average annual total returns reflect the deduction of the maximum 5.75% sales charge for Class A Shares of Oppenheimer SteelPath MLP Alpha (11.11, -4.09, 2.53 and 4.66%), Income (17.03, -5.01, 1.33 and 3.29%), Select 40 (7.83, -3.32, 2.65 and 4.98%) and MLP Alpha Plus (20.69, and 1.52%) Funds for the 1-year, 3-year, 5-year and since inception periods ended 12/30/2016. Fund returns do not consider capital gains or income taxes on an individual s investment. Source: Bloomberg and Morningstar Direct. December 2011 December Standard deviation - A measure of the dispersion of a set of data from its mean for the three year period ending 12/30/ Sharpe Ratio - measure that indicates the average return minus the risk-free return divided by the standard deviation of return on an investment for the three year period ending 12/30/ Correlation - statistical measure of how two securities move in relation to each other for the three year period ending 12/30/ Fixed Income is represented by Barclays U.S. Aggregate Bond Index for the three year period ending 12/30/16. See appendix for standardized performance. 19

20 Risks Fundamental Risks Capital Markets: The inability of MLPs to access capital markets to raise assets through the issuance of equity and debt securities. Regulatory: Laws enacted which would ban the use of hydraulic fracturing, which has been the major technique used to extract large volumes of crude oil, natural gas and natural gas liquids domestically. A change in methodologies related to FERC tariff adjustments. Disruption of Supply: A long-term supply disruption which could negatively impact shipping, storage and processing volumes. Legislative: The threat of a tax law change removing the pass-through nature of MLPs. Market Risks Headline: MLPs may trade down with other energy related securities given investor perceptions that MLPs will be fundamentally affected by changes in underlying commodity weakness. Appetite for Risk Assets: When market sentiment is risk averse, equity security allocations (including MLPs) tend to be reduced. Interest Rate: A rise in interest rates could make other income producing securities attractive and cause investors to favor other yield oriented instruments. Secondarily, a sudden spike in interest rates could cause investors to flee, fearing pricing pressure on yielding securities. 20

21 Disclosures 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. Each 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. Additional management fees and other expenses are associated with investing in MLP funds. The Oppenheimer SteelPath MLP Funds are subject to certain MLP tax risks. An investment in an Oppenheimer SteelPath MLP Fund does not offer the same tax benefits of a direct investment in an MLP. The Funds are organized as Subchapter C Corporations and are 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 after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. The Funds portfolio strategies and holdings, are dollar weighted based on assets and are subject to change. Holdings mentioned in this report do not constitute a recommendation by the Funds or OFI SteelPath, Inc. 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. Master Limited Partnerships (MLPs) are represented by the equal-weighted average of the energy MLP universe. 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. Real Estate Investment Trusts (REITs) are represented by the FTSE NAREIT Equity REIT Index and are securities that sell like a stock on the major exchanges and invest directly in real estate. Risks of investing in REITs include, but are not limited to: legal, political, liquidity, interest rate risks, a decline in the value of real estate, risks related to economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrowers. Utilities are represented by the Dow Jones Utilities Index. The prices of the securities of utilities companies may fluctuate widely due to government regulation; the effect of interest rates on capital financing; competitive pressures due to deregulation in the utilities industry; supply and demand for services; increased sensitivity to the cost of natural resources required for energy production; and environmental factors such as conservation of natural resources or pollution control. Fixed Income is represented by Barclays Aggregate Bond Index. Investing in debt securities involves risks including interest rate risk, credit risk and duration risk. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Dow Jones is a price-weighted measure of 30 U.S. blue-chip companies. The Dow covers all industries with the exception of transportation and utilities, which are covered by the Dow Jones Transportation Average and Dow Jones Utility Average. The NASDAQ is a market-capitalization weighted index of the more than 3,000 common equities listed on its stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The S&P 500 Index is an unmanaged capitalization-weighted index (weighted by the market value of the companies) of 500 stocks listed on various exchanges. The Barclays Capital Investment Grade Natural Gas Pipelines Index is the Pipelines component of the Barclays Capital Investment Grade Natural Gas Index comprised of natural gas pipeline entities. The debt issues in the Index are publicly issued and investment grade with at least $250 million outstanding and at least one year to final maturity regardless of call features. Index performance is shown for illustrative purposes and does not predict or depict performance of the funds. Indices are unmanaged and cannot be purchased directly by investors. 21

22 These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of December 30, 2016 and are subject to change based on subsequent developments. 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.. This material has been prepared by OppenheimerFunds Distributor, Inc. for institutional investors only. It has not been filed with FINRA, may not be reproduced and may not be shown to, quoted to or used with retail investors. It is intended to provide an overview of the Funds performance for the stated report period and should be viewed in its entirety. Individual pages should not be reviewed or distributed in isolation. 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 visiting oppenheimerfunds.com or calling CALL OPP ( ). Investors should 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. 22

23 Performance (%) Average Annual Total Returns at NAV as of December 31, Q Year 3-Year 5-Year 10-Year Since Inception 2,3 Oppenheimer SteelPath MLP Alpha Fund (Class A Shares) 2.26% 17.93% -2.19% 3.76% 5.58% Oppenheimer SteelPath MLP Income Fund (Class A Shares) Oppenheimer SteelPath MLP Select 40 Fund (Class A Shares) Oppenheimer SteelPath MLP Alpha Plus Fund (Class A Shares) Alerian MLP Index Total Return 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 may be lower or higher than the performance data quoted. For performance data current to the most recent month-end, visit oppenheimerfunds.com or call CALL.OPP ( ). Fund returns quoted above are for Class A shares and include changes in share price and reinvested distributions, but not the maximum sales charge applicable to Class A shares. If the sales charge was considered, performance quoted above for Class A shares would be lower. The following average annual total returns reflect the deduction of the maximum 5.75% sales charge for Class A Shares of Oppenheimer SteelPath MLP Alpha (11.11, -4.09, 2.53 and 4.66%), Income (17.03, -5.01, 1.33 and 3.29%), Select 40 (7.83, -3.32, 2.65 and 4.98%) and MLP Alpha Plus (20.69, and 1.52%) Funds for the 1-year, 3-year, 5-year and since inception periods ended 12/30/2016. Fund returns do not consider capital gains or income taxes on an individual s investment. 1. Returns for these periods are cumulative and not annualized. 2. The inception date is 3/31/2010 for the Oppenheimer SteelPath MLP Alpha, Income and Select 40 Funds. 3. The inception date is 2/6/2012 for the Oppenheimer SteelPath MLP Alpha Plus Fund. 4. Please refer to disclosure statements for definition of indices. Gross expense ratios are 1.63%, 1.49%, 1.23%, and 2.30% for Oppenheimer SteelPath Alpha, Income, Select 40 and Alpha Plus Funds respectively. Past performance does not guarantee future results. 23

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