PARKER GLOBAL STRATEGIES, LLC MLP QUARTERLY REVIEWS

Transcription

1 MLP QUARTERLY REVIEWS

2 TABLE OF CONTENTS: Sections Page I. 1 st Quarter 2011: 3 II. 2 nd Quarter 2011: 9 III. 3 rd Quarter 2011: 15 IV. 4 th Quarter 2011: 20 2

3 MLP Quarterly Update First Quarter, 2011 MLPs had another strong quarter to start 2011, extending outperformance over credit and utilities, and keeping pace with the broad-market S&P500, but falling short of REITs and energy on a total return basis. Once again MLPs were able to quickly rebound from broad-market volatility this time related to events in Japan and the Middle East to mark their 9 th consecutive quarter of positive performance. The fundamental backdrop for MLPs remains strong, MLP balance sheets are well-capitalized, and capital markets remain readily accessible at favorable costs. Distribution growth continues to accelerate, driven by an active acquisitions market and newbuild opportunities around developing shale plays. As investors continue to show strong interest in the MLP value proposition, namely a healthy yield advantage over alternatives with visible and accelerating distribution growth, the outlook for the asset class remains bright. 1Q:2011 Trailing 12 months Trailing 24 months Price TR v. AMZ Price TR v. AMZ Price TR v. AMZ AMZ 4.5% 6.0% % 33.0% % 128.4% - SPX 5.4% 5.9% -0.1% 13.4% 15.6% -17.4% 66.2% 73.2% -55.2% S5ENRS 16.3% 16.8% 10.8% 37.0% 39.8% 6.8% 73.5% 81.1% -47.3% S5UTIL 1.6% 2.7% -3.2% 7.4% 12.3% -20.7% 24.2% 35.9% -92.5% NAREIT % 7.7% 1.8% 20.4% 25.7% -7.3% 128.3% 151.0% 22.6% EXECUTIVE SUMMARY: PGS Premier Energy Income Fund posted a net return of 4.5% in Q1 The portfolio remains centered around core midstream MLPs, exits Q1 yielding 6.3%. Gathering & Processing MLPs were again the strongest performers, contributing 242 bps on a gross basis. The Quarter in Review As yield compression decelerates we are seeing MLP relative performance driven to a greater degree by news flow that has bearing on distribution growth prospects. To that point, acquisition and drop-down activity continued at a record pace, underpinned by a favorable financing backdrop. Above average performance was also registered this quarter by non-core MLPs with exposure to commodity prices and processing margins. The median midstream MLP yield finished the quarter at 6.0%, which remains attractive by comparison with corporate bonds and other yield-oriented investments. Outlook Yields within the sector remain attractive at a time when quality yield is scarce. Growth is increasingly visible in the coming quarters as acquisitions are assimilated and organic projects reach completion. Pairing a favorable financing picture with a large and diverse opportunity set, we see average distribution growth rates conservatively in the 5-6% range for at least the next two years, with many individual partnerships growing distributions by double digits. 3

4 PGS Premier Energy Income Fund The PGS Premier Energy Income Fund returned 4.5% in Q1, following its 2010 return of 27.2%. Outperforming sectors this quarter included Natural Gas Gathering & Processing (G&P), General Partners (GPs), and Natural Gas Midstream, which contributed 242, 166, and 114 basis points, respectively. The largest single name contributor was Energy Transfer Equity (ETE), followed by Williams Partners (WPZ), MarkWest Energy Partners (MWE). ETE added 137 basis points on a Q1 total return of 16.8%, as it benefitted from an announced deal between Energy Transfer Partners (ETP) and Regency Energy Partners (RGNC) where the two MLPs formed a joint venture to acquire $1.9 billion of midstream NGL infrastructure in Mont Belvieu, TX - the major market center for NGLs. ETE is the GP of both ETP and RGNC, and as both issued new units in order to finance the deal, and the associated Incentive Distribution Rights (IDRs) on these units will be immediately accretive to cash flows for ETE. WPZ and MWE contributed 102 and 68 basis points, respectively, on total returns of 12.7% and 13.6%. These MLPs are among those with the most significant exposure to the strong pricing environment and shale-driven volume ramp up in natural gas liquids (NGLs). Both are expected to deliver above-average distribution growth going forward. 1 Historical Performance Performance Analysis: Benchmark Analysis YTD Return: 4.5% Sharpe (0.24% RFR) Month Return: 23.4% Correlation: Alerian MLP TR: 1.0 Average Monthly Return: 1.3% Correlation: HFRI FOF: 0.6 Maximum Monthly Return: 13.7% Correlation: NAREIT: 0.3 Maximum Run-Up: 64.2% Correlation: MSCI EAFE: 0.5 Gross Performance Attribution by Sub-Trust Gross Performance Attribution by Sector Manager E, Large Cap Liquidity 3.0% Nat Gas G&P GPs 1.7% 2.4% Manager B, Broad Sector 1.4% Nat Gas Midstream E&P 0.6% 1.1% Manager A, Best Ideas 1.4% Refined Products Mid. Crude Oil Midstream 0.5% 0.4% Manager D, Large Cap 1.2% Other 0.4% Manager C, Opportunistic 0.3% Coal Propane 0.1% 0.1% The overall positioning of the portfolio remains unchanged quarter-over-quarter, with the majority of the Fund s assets allocated towards core midstream MLPs. The Fund also remains focused on MLPs with the strongest prospects for distribution growth, including several major dropdown stories, and anticipates that growth will be a key driver of returns going forward. The lack of competitive yield options in the marketplace persists, and when considered in conjunction with the upbeat outlook for distributions in 2011, we believe the investment case for MLPs remains strong. 1 All Fund attribution figures are presented gross of fees. 4

5 The Quarter in Review The Alerian Index returned 4.5% in price terms and 6.0% in total return during the first quarter, outperforming yield-oriented investments such as utilities and bonds, and keeping pace with broader equity markets, while modestly trailing REITs. Energy and commodities continued to rally during the quarter, outdistancing other asset classes by a wide margin. The median midstream MLP yield finished the quarter at 6.01%, 254 bps above 10-year Treasuries (3.47%), and attractively positioned by comparison with corporate bonds and other yieldoriented investments. 40% 35% Relative Performance - Total Returns 30% 25% Q1: % 15% 10% 5% 0% MLPs REITs Energy HY Corp S&P 500 BBB Corp Utilities 16% 14% 12% 10% Median Midstream MLP Yield REIT Yield BBB Corporate Yield 10 Year Treasury Yield Historical Yields 8% 6% 4% 2% 0% Mar-01 Mar-02 Mar-03 Mar-04 Mar 05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 MLP sub-sector yield differentials continued to narrow over the quarter, though this trend has decelerated as we move closer to convergence. Relative performance is now being driven to a much greater degree by company-specific news flow that has bearing on distribution growth prospects, i.e. acquisitions and organic expansion announcements. Above average performance this quarter was also registered by higher-beta, noncore MLPs with exposure to commodity prices (Exploration & Production, Coal) and processing margins (Gathering & Processing). We note that the keep-whole processing margin surged over 10% to a new high this month as NGL prices increased while gas prices held steady. 5

6 15% 16% 14% MLP Average Total Returns by Sector (Distribution Payers Only) Sector Average 1Q11 Alerian Index 1Q11 10% 11% 10% 8% 5% 5% 5% 4% 3% 0% General Partners Exploration & Production Coal Marine Logistics Natural Gas Gathering & Processing Natural Gas Midstream Crude Oil Midstream Propane Refined Products Midstream 12% MLP Average Yields by Sector (Distribution Payers Only) March 2010 December 2010 March % 7.4% 6.7% 6.5% 6.4% 6.1% 6.0% 5.9% 5.9% 4% 4.7% 0% Marine Logistics Exploration & Production Refined Products Midstream Propane Crude Oil Midstream Natural Gas Midstream Natural Gas Gathering & Processing Coal General Partners Returns this quarter for some of the core Midstream MLPs lagged behind energy and commodity-sensitive sectors, but fundamentals remain very strong across the entire spectrum of MLP sub-sectors. Domestic energy production is growing, with gas, oil and NGL volumes each up in the mid to high single-digit range year-overyear. Importantly, marginal volume growth and drilling migration toward more prolific shale plays has created a pressing need for all types of infrastructure development, and an organic opportunity set that is more robust than ever. MLPs will continue to be the key beneficiaries of this trend. Capital Markets Update Receptive capital markets and declining cost of capital provide the means for MLPs to pursue attractive growth initiatives all along the energy value chain. MLPs continued to raise capital at a record pace, issuing $12.6 billion in debt and equity during the first quarter. On the equity side, $4.2 billion was raised through 15 secondary offerings and 2 private placements. This figure excludes $866 million that was sold in 4 partner offerings, which are public issuances of MLP securities owned by management, parent companies or private 6

7 equity sponsors. While the dollar volume of secondary equity offerings has been large, we note that recent issuance as a percentage of overall MLP market capitalization has not been extraordinary. This contributes to increasing liquidity, and speaks to the maturity of the asset class. There were no new MLP IPOs this quarter, but there was one in April and several more are expected later this year. Another $8.4 billion of debt securities was issued, setting a record for a single quarter. This includes 9 investment grade offerings, totaling $5.5 billion, 7 high yield offerings totaling $2.6 billion, and a private offering of $300 million (HY issuer). A steady decline in weighted-average cost of capital, combined with project returns and acquisition multiples that have held up at attractive levels, implies that MLPs are earning slightly better spreads over their funding costs. Strong demand for debt instruments has enabled MLPs to term-out their bank lines and redeem higher coupon offerings. All of this contributes to growth visibility with lower associated risk. $35 MLP Capital Markets Summary (US$ Bn) $34.1 $30 $25 MLP Debt Issuance MLP Equity Issuance Totals $14.3 $20 $17.9 $15 $10 $5 $0 $7.8 $11.0 $12.6 $6.2 $9.3 $3.2 $7.7 $19.8 $4.2 $5.6 $6.0 $4.5 $2.8 $3.2 $4.0 $10.1 $2.6 $7.8 $8.4 $3.4 $4.8 $3.7 Q1:09 Q2:09 Q3:09 Q4: Total Q1:10 Q2:10 Q3:10 Q4: YTD Q1:11 Mergers & Acquisitions Update In tandem with capital markets activity, MLP acquisition volume likewise maintained its record pace in the first quarter. MLPs announced or completed another $8 billion in acquisitions this quarter, spread across 17 deals and incorporating all MLP sub-sectors. There were two major dropdown transactions (sales of assets by parent or sponsor companies into affiliated MLP entities), one by Teekay Offshore Partners (TOO), a Marine Logistics MLP, and the other was El Paso Pipeline Partners (EPB) purchase of an additional interest in the Southern Natural Gas (SNG) pipeline system. Other notable transactions included the $1.3 billion acquisition by Enterprise Products Partners (EPD) of another affiliated MLP, Duncan Energy Partners (DEP), and the joint $1.9 billion purchase of a major package of NGL infrastructure assets by Energy Transfer Partners (ETP) and Regency Energy Partners (RGNC) from a private equity seller. Deal flow remains strong as integrated majors (e.g. BP) and independent producers (e.g. Petrohawk) are motivated to divest non-core midstream assets, while private equity sellers are emerging to monetize mature multi-year investments. Additionally, drop-down stories continue to evolve at MLPs such as Chesapeake Midstream Partners (CHKM, drops from CHK) and Western Gas Partners (WES, drops from APC). We expect M&A activity to continue as an important source of growth going forward. 7

8 $50,000 MLP Mergers & Acquisitions (US$ MM) $40,000 $30,000 GP Consolidations Major Strategic Transactions Acquisitions 2011 Annualized $20,000 $10,000 $ Source: Barclays Capital estimates YTD Outlook MLP equity metrics have normalized to what might be considered fair value on a historical basis, and prices have reached new highs, but current distributions within the sector remain attractive and continue to grow at a time when quality yield is scarce. The fact that MLPs have consistently been able to bounce back from market events such as what we saw this quarter is encouraging evidence of their attractive relative value. The events surrounding Fukushima and the Arab Spring, from an investment perspective, highlight the importance of energy security and supply diversity. Meeting the long term needs for a safe, reliable energy supply will require the ongoing development of all available resources, including petroleum, natural gas, coal, nuclear and renewables. In the United States, thanks to advancements in drilling technology, a key component of this mix is a 100+ year supply of natural gas reserves, along with associated natural gas liquids (NGLs). Similar technology has also led to increases in domestic crude oil production for the first time in over a generation. Development of these resources will require continuous investment in new infrastructure to alleviate bottlenecks that are developing all along the energy value chain, from gathering, processing and refining, to storage, transportation and delivery. MLPs, with their operational expertise, low funding costs and strong presence in emerging supply basins, are well positioned to continue to capture market share and deliver solid returns for investors in the energy infrastructure space. Growth is increasingly visible in the coming quarters as acquisitions are assimilated and organic projects reach completion. Acquisition multiples and organic spending IRRs remain healthy, while the cost of capital has declined steadily. Pairing the favorable financing picture with a large and diverse opportunity set that includes asset dropdowns, acquisitions from major producers and shale basin infrastructure development, we see average distribution growth rates conservatively in the 5-6% range for at least the next two years, with many individual partnerships growing distributions by double digits. 8

9 MLP Quarterly Update Second Quarter, 2011 MLPs rebounded to outperform broader markets in June, but underperformed for the second quarter on the whole due to a sell-off in May that was primarily related to sovereign credit concerns and a sharp pullback in the energy sector. In its first negative quarter since the financial crisis of 2008, the benchmark Alerian Index posted a total return of -0.7% and closed June yielding 6.19%, 22 bps higher than last quarter, and right where it stood at the beginning of the year. Despite recent volatility, these results put MLPs on track for the 2011 base case that we outlined in January: ±6% current yield + 5-6% distribution growth, leading to a low-mid double digit total return for the year. The fundamental backdrop for MLPs remains strong and distribution growth continues to accelerate, driven by an active acquisitions market and new-build opportunities around developing shale plays. 2Q:2011 YTD Trailing 12 months Price TR v. AMZ Price TR v. AMZ Price TR v. AMZ AMZ -2.2% -0.7% - 2.2% 5.2% % 27.9% - SPX -0.4% 0.1% 0.8% 5.0% 6.0% 0.8% 28.1% 30.7% 2.8% S5ENRS -5.1% -4.6% -3.9% 10.4% 11.4% 6.2% 49.8% 52.8% 25.0% S5UTIL 5.0% 6.1% 6.9% 6.7% 9.1% 3.8% 18.5% 23.9% -4.0% FNR5 2.3% 3.4% 4.2% 9.2% 11.4% 6.2% 28.8% 34.4% 6.5% EXECUTIVE SUMMARY: PGS Energy Opportunities Trust returned +0.3% in Q2, +6.0% YTD The portfolio remains centered around core midstream MLPs, and closed Q2 with a yield of 6.9%. Gathering & Processing MLPs were again the strongest performers, contributing 93 bps on a gross basis. The Quarter in Review Despite intra-quarter volatility and meaningful return dispersion, overall MLP returns were muted in the second quarter. Sectors with sensitivity to commodities generally underperformed, while Gathering & Processing and Refined Products Midstream partnerships fared better, on average. MLPs continue to benefit from a favorable capital markets backdrop, supporting acquisitions and drop-down activity, and ultimately distribution growth. The median midstream MLP yield finished the quarter at 6.2%, which remains attractive by comparison with corporate bonds and other yield-oriented investments. Outlook Distribution growth has been coming in slightly ahead of consensus expectations and is increasingly visible in the coming quarters. Pairing a favorable financing picture with a large and diverse opportunity set, we see average distribution growth rates conservatively in the 5-6% range for at least the next two years, with many individual partnerships growing distributions by double digits. Highlighting the need for continued investment, a detailed report was published at the end of June by the Interstate Natural Gas Association of America (INGAA) that projects $10 billion per year will need to be spent on midstream energy infrastructure through

10 PGS Energy Opportunities Trust The PGS Energy Opportunities Trust gained 0.3% in Q2, bringing its 2011 year-to-date return to 6.0%. Natural Gas Gathering & Processing (G&P) MLPs were this quarter s strongest performers, adding approximately 93 basis points to the Trust s overall performance. The largest single name contributor was Williams Partners (WPZ), followed by Plains All American Pipeline (PAA) and Enterprise Products Partners (EPD). WPZ added 81 basis points on a Q2 total return of 6.0%, as investors showed continued interest in the company, with catalysts including quality Q1 earnings results and an increase in WPZ s Q2 distribution. PAA and EPD also had strong quarters with healthy distribution growth. EPD benefitted from strong NGL pricing and organic growth within its processing business, while PAA benefitted from wide crude oil time and location spreads. 2 Hist orica l Perform a n ce Performance Analysis: Benchmark Analysis YTD Return: 6.0% Sharpe (0.2 2 % RFR) Month Return: 23.8% Correlation: Alerian MLP TR: 1.0 Average Monthly Return: 1.4% Correlation: HFRI Equity Hedge: 0.6 Maximum Monthly Return: 14.4% Correlation: NAREIT: 0.3 Maximum Run-Up: 66.4% Correlation: MSCI EAFE: 0.5 Performance Attribution by Sector Allocation by Sector Natural Gas Gathering & Processing 0.9% Natural Gas Midstream 32% Crude Oil Midstream 0.3% Natural Gas Gathering & Processing 21% General Partners 0.2% Refined Products Midstream 18% Exploration & Production 0.2% Crude Oil Midstream 10% Natural Gas Midstream 0.1% Exploration & Production 10% Refined Products Midstream -0.3% General Partners 8% The overall positioning of the portfolio remains largely unchanged quarter-over-quarter. We took advantage of market strength in April to reduce our long exposure across the core portfolio, which helped during the market sell-off in May, as we were then able to accumulate positions at attractive valuation levels in several high quality, growth-oriented MLPs. The majority of the Trust s assets remain allocated to core midstream MLPs, and we continue to focus on MLPs with the strongest prospects for sustainable distribution growth, which we expect to be the key driver of outperformance on a total return basis. Overall we view the recent retracement in global financial markets as a compelling opportunity to initiate or accumulate MLP positions given their yield advantage over alternative income sources and strong long term growth profiles. 2 All Fund attribution figures are presented gross of fees. 10

11 The Quarter in Review The Alerian Index returned -2.2% in price terms and -0.7% in total return during the second quarter, underperforming the S&P 500 (+0.1%), REIT 50 (+1.4%) and S&P Utilities (+6.1%). MLPs outpaced the S&P Energy Index (-4.6%), as crude oil fell by 10.6% quarter-over-quarter, including a 20% peak to trough decline from a high of $114 at the end of April to a low of around $90 in late June. Natural gas was generally flat for the quarter. The median midstream MLP yield finished the quarter at 6.23%, 307 bps above 10-year Treasuries (3.16%) and 184 bps above BBB corporates. These spreads suggest attractive relative value, particularly with respect to corporate credit, given relative risk and distribution growth prospects. Though overall MLP performance was muted this quarter, individual and sector performance were mixed, underscoring the importance of security selection in a challenging macro environment. There were 19 partnerships advancing against 43 declines (excluding recovery situations and new IPOs), and there was a greater skew toward negative performance (average gain of 2.5% versus average decline of 5.7%). MLP Total Returns Q2:

12 In a reversal of last quarter, upstream and commodity sensitive sub-sectors led relative performance on the downside, reflecting crude oil weakness, while propane and natural gas storage came under pressure due to challenging spreads and lower demand growth. Midstream gas and liquids held up somewhat better, reflecting robust fundamentals and strong distribution growth, but were nonetheless impacted by macro concerns related to sovereign credit and a weak economic recovery. Gathering & Processing continues to benefit from strong processing economics and increasing volume throughput from drilling migration toward the wetter shale plays. Crude Oil and Refined Products Midstream operators had a strong quarter on the back of volume increases, as well as wide time and location spreads that increased both the intrinsic value of their midstream services and provided arbitrage opportunities on the marketing side. Beginning July 1 st, liquids pipeline operators will also begin to benefit from a new tariff escalator equal to PPI for finished goods +2.65%, or 6.8%. The escalator had previously been set by the FERC at PPI + 1.3% annually for the past five years. Distributions Update Coming off a trough in that reflected especially conservative investment decisions on the part of MLP management teams in the wake of the financial crisis, distribution growth is beginning to accelerate, with more partnerships electing to increase distributions, and higher growth rates, on average. During Q2:11, 32 of 52 partnerships increased distributions sequentially from Q1:11 levels and 44 of 52 had higher distribution rates year-over-year. The average change in sequential distributions was 1.3%, while the average Q/Q growth among those that increased distributions was 2.1%. Year-over-year, the average change was 4.8% across all partnerships and 5.7% among those that had increased distributions. The recent round of distribution announcements in July and August indicates that distribution growth continues to tick upward: the average distribution was higher by 1.7% Q/Q and 5.4% Y/Y, with increases averaging 2.5% Q/Q and 6.4% Y/Y. 12

13 Capital Markets Update MLPs continued to raise capital at a brisk pace, issuing $9.4 billion in debt and equity during the second quarter. On the equity side, $4.8 billion was raised through 13 secondary offerings, 3 private placements, a warrant exercise, and 5 IPOs. Another $4.6 billion was raised by 9 MLP issuers in the debt markets. This brings total year-to-date issuance to $9 billion in equity and $12.9 billion in debt; on an annualized basis we are on track to surpass the record capital markets issuance of Capital markets remain open for all MLP subsectors, and for both investment-grade and high-yield issuers. A steady decline in weighted-average cost of capital, combined with project returns and acquisition multiples that have held up at attractive levels, implies that MLPs are earning slightly better spreads over their funding costs. All of this contributes to growth visibility. Mergers & Acquisitions Update MLPs announced or completed another $14.4 billion in acquisitions this quarter, bringing year-to-date deal volume to $22.4 billion. These figures include a major strategic acquisition by Energy Transfer Equity (ETE) of non-mlp pipeline operator Southern Union (SUG). Following a competitive bidding process, the final value of the deal was approximately $9.4 billion. Major drop-down transactions (sales of assets by parent or sponsor companies into affiliated MLP entities) included Williams Partners (WPZ) $300 million acquisition of an additional interest in the Gulfstream Pipeline system and El Paso Pipeline Partners (EPB) $745 million purchase of additional interests in the Southern Natural Gas (SNG) and Colorado Interstate Gas (CIG) pipeline systems. We expect M&A activity to remain an important source of growth as energy infrastructure assets continue to migrate into the MLP structure. Source: Barclays Capital estimates 13

14 Outlook In contrast to recent market action, the fundamental backdrop for MLPs remains quite strong, while current distributions within the sector remain attractive at a time when quality yield is scarce. The outlook for distribution growth is as bright as it has been in many years as funding remains readily and inexpensively available, project returns remain attractive, and MLPs continue to push forward with acquisitions and organic projects around developing shale plays and bottlenecks across the energy value chain. At the end of June the Interstate Natural Gas Association of America published an update to its midstream infrastructure study, which highlights the need for continued investment in infrastructure in order to connect evolving supply basins with growing demand centers. The largest driver of infrastructure demand, not surprisingly, is the continued development of unconventional (shale) gas production. While conventional on and off-shore production is expected to continue to decline in the coming decades, total North American shale gas production is projected to increase from 13 Bcf/d (20-25% of total production) in 2010 to 52 Bcf/d (60-70% of total production) by Pairing supply-driven infrastructure needs with changing demand dynamics, the study estimates an average of $8.2 billion per year will need to be spent on natural gas infrastructure, for a total of $205 billion over the next 25 years (denominated in 2010 dollars). This includes $98 billion for gas transmission mainline, $42 billion for gathering lines and $22 billion for gas processing capacity. Additionally, the study projects that roughly $50 billion will need to be invested over the next 25 years in pipeline infrastructure for the transport of oil and NGLs. In summary, INGAA s report details an outstanding opportunity set for energy infrastructure in the coming decades, and we expect this trend to continue to drive meaningful growth and attractive long term total returns in the MLP space. Please contact us for a copy of the INGAA study, or to discuss any of this in greater detail. Regional Gas Infrastructure Capital Requirements for (Billions of 2010$) 14

15 MLP Quarterly Update Third Quarter, 2011 Market conditions were challenging during the third quarter, with concerns over European debt and weak economic sentiment contributing to a broad based risk-off environment, with elevated volatility and wider credit spreads. The S&P 500 was down 14.3%, with energy and materials among the hardest hit sectors, down 21% and 25%, respectively. Crude oil was down 17%. MLPs returned -8.4% on average for the quarter, outperforming broader markets, but trailing traditionally defensive sectors such as utilities (+0.4%) and consumer staples (-5%), as well as investment grade credit (+2.6%). Despite the bearish market backdrop, MLPs underlying businesses continued to deliver steady operating results. Distribution growth has remained strong, with positive momentum stemming from ongoing investment to develop much needed midstream energy infrastructure solutions. As a result, MLP valuations have again become unusually attractive. The median midstream MLP exited September yielding 7.03%, with spreads to 10-year Treasuries of 511 bps and to BBB credit of 262 bps, in each case greater than one standard deviation above long run averages. Volatility appears likely to persist for the time being, but from these dislocated levels of valuation, and with significant growth visibility, the outlook for MLP total returns is as strong as it has been at any point since Q:2011 YTD Trailing 12 months Price TR v. AMZ Price TR v. AMZ Price TR v. AMZ AMZ -8.4% -7.0% % -2.1% - 0.8% 7.0% - SPX -14.3% -13.9% -6.9% -10.0% -8.7% -6.6% -0.9% 1.1% -5.8% S5ENRS -20.9% -20.5% -13.5% -12.6% -11.4% -9.3% 5.6% 7.6% 0.7% S5UTIL 0.4% 1.5% 8.5% 7.2% 10.7% 12.9% 7.2% 12.0% 5.0% FNR5-14.9% -13.9% -6.9% -7.0% -4.0% -1.9% -2.1% 2.3% -4.7% EXECUTIVE SUMMARY: PGS Energy Opportunities Trust returned -9.2% in Q3, -3.8% YTD The Quarter in Review While outperforming the broader market, MLPs sold off during the quarter with very few exceptions. Investors showed a strong preference for growth over yield, as MLPs with strong and visible growth prospects and lower yields fared much better than names with lower growth and/or thin distribution coverage and relatively high yields. MLPs continue to benefit from a favorable capital markets backdrop, supporting organic spending and acquisition activity, and ultimately distribution growth. Outlook Distribution growth has been accelerating, and appears to have sufficient momentum from ongoing investments to sustain a % pace for at least the next two years, even if economic growth stagnates. The median midstream MLP yield finished the quarter at 7.0%, which is very attractive relative to corporate bonds and other yieldoriented assets. High yields and meaningful growth are compelling on their own, but cheap valuations and dislocated spreads suggest yield compression will again drive outsized returns for investors willing to tolerate the interim volatility. 15

16 The Quarter in Review The Alerian Index returned -8.4% in price terms and -7.0% in total return during the second quarter, outperforming the S&P 500 (-14.3%), REIT 50 (-14.9%) and S&P Energy (-20.9%), but underperforming defensive areas such as Utilities (+0.4%) and BBB Credit (+2.6%). The median midstream MLP yield finished the quarter at 7.03%, 511 bps above 10- year Treasuries, which traded inside of 2% amid the flight to safety, and 262 bps above BBB corporates. For perspective, these spreads are both more than 1 standard deviation wide of historical norms, signaling excellent value (more on this later). Investors showed a strong preference for growth over yield, as MLPs with strong and visible growth prospects fared better, despite meaningfully lower yields, than names with lower growth and/or thin distribution coverage. The top performing sector this quarter was Exploration & Production at -2%, although the average is skewed by EV Energy Partners (EVEP), which returned +36% during the quarter (90% YTD), reflecting the value of its untapped Utica Shale acreage. Ex-EVEP, the average E&P return was -8%, which is a more in line with the other sectors, but still relatively strong given the ongoing weakness in commodity prices (WTI -17%, natural gas -16%). The next best sectors were Diversified Large Cap and Liquids Midstream, each averaging -5%. Diversified Large Cap MLPs were almost uniformly in the top tier of performance, reflecting a flight to safety and liquidity, but also strong growth prospects within the group. Liquids pipeline operators began to benefit in July from a new tariff escalator, equal to PPI for finished goods +2.65%, or 6.8%. The escalator had been set by the FERC at PPI + 1.3% annually for the past five years. Similarly to E&P, the average return in the Natural Gas Midstream sector was also skewed, in this case to the downside, by two natural gas storage MLPs. Removing storage, the average natural gas midstream return was -7%. 16

17 Distributions Update In line with our expectations, distribution growth continues to accelerate as cash flows from acquisitions and organic spending projects come online, with more partnerships electing to increase distributions, and higher growth rates, on average. During quarterly earnings season in July and August, 37 partnerships increased distributions sequentially from Q2:11 levels and 46 had higher distribution run-rates year-over-year. The average change in sequential distributions was 1.8%, while the average Q/Q growth among those that increased distributions was 2.6%. Year-over-year, the average change was 5.4% across all partnerships and 6.4% among those that had increased distributions. In October, the latest round of distribution announcements shows more of the same, with 31 Q/Q and 47 Y/Y increases. The average distribution was higher by 1.3% Q/Q and 5.7% Y/Y, with increases averaging 2.3% Q/Q and 6.7% Y/Y. 14% 12% 10% 8% 6% 4% 2% 0% MLP Distribution Growth (Year-over-Year, ex-cuts) Average (Growers) Average (All) Median Q1:09 Q2:09 Q3:09 Q4:09 Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11 Q3:11 Q4:11 MLP Sequ en tia l Dist r ibu t ion Com ps Q1:11 Q2:11 Q3:11 Q4:11 Average 1.2% 1.4% 1.8% 1.3% Median 1.0% 1.0% 1.3% 0.9% # Increases Avg. Increase 2.0% 2.3% 2.6% 2.3% MLP Annual Distribution Comps Q1:11 Q2:11 Q3:11 Q4:11 Average 4.7% 4.7% 5.4% 5.7% Median 3.4% 3.7% 4.5% 4.8% # Increases Avg. Increase 6.1% 5.7% 6.4% 6.7% Capital Markets Update Capital markets activity slowed somewhat, with MLPs issuing $7.2 billion in debt and equity during the third quarter. In equity markets, $2 billion was raised through 8 secondary offerings, 2 IPOs and a direct placement. The slowdown from the first half of 2011 is unsurprising given the volatile market backdrop, but access remains healthy considering that 2011 capital budgets have largely been filled. We would expect to see an uptick as markets settle down and 2012 capital spending needs begin to take shape. Another $5.1 billion was raised by 6 investment grade and 3 high yield MLP issuers in the debt markets, with maturities ranging from 5 to 30 years. This brings total year-to-date issuance to just over $11 billion in equity and $19 billion in debt, on track to surpass the record issuance year of

18 $35 $30 $25 $20 MLP Debt Issuance MLP Equity Issuance Totals MLP Capital Markets Summary (US$ Bn) $34.1 $14.3 $17.9 $30.1 $11.0 $15 $10 $5 $0 $2.8 $6.2 $5.6 $3.2 $7.8 $10.1 Q1:09 Q2:09 Q3:09 Q4: Total $11.0 $3.2 $7.8 $9.3 $7.7 $6.0 $4.5 $4.0 $2.6 $3.4 $4.8 $3.7 $19.8 Q1:10 Q2:10 Q3:10 Q4: Total $12.6 $10.4 $4.2 $7.2 $19.1 $4.8 $2.0 $8.4 $5.6 $5.1 Q1:11 Q2:11 Q3: YTD MLP Equity Issuance - Q3:2011 MLP Debt Issuance - Q3:2011 Price Amt. ($mm) Price Amt. ($mm) Term Coupon Amt. ($mm) Term Coupon Amt. ($mm) 7/5/2011 TOO $ /11/2011 PAA $ /28/2011 SXL % 300 8/17/2011 MMP % 250 7/8/2011 MWE $ /8/2011 CLMT $ /28/2011 SXL % 300 8/20/2011 APU % 450 7/13/2011 OILT* $ /14/2011 CQP $ /3/2011 KMP % 375 9/6/2011 EEP % 600 7/13/2011 RNO $ /20/2011 WES $ /3/2011 KMP % 375 9/6/2011 EEP % 150 7/15/2011 GEL $ /22/2011 EEP $ /10/2011 WPZ % 375 9/7/2011 CLMT % 200 7/26/2011 AMID* $ /10/2011 EPD % 650 9/15/2011 EPB % 500 8/10/2011 EPD % 600 * IPO TOTAL 2,045 TOTAL 5,125 Mergers & Acquisitions Update Acquisition activity also slowed down this quarter, with just a handful of transactions outside of the E&P sector. Total deal flow was just over $2 billion, bringing the year-to-date figure to $15 billion, excluding the pending Energy Transfer Equity (ETE) bid for Southern Union (SUG) from Q2. We expect M&A activity to remain an important source of growth as the drivers remain in place for energy infrastructure assets to continue to migrate into the MLP structure from major integrated energy companies, e&p and private equity interests. That said, we note that recent capital spending has been trending toward organic projects in emerging or underdeveloped production areas and key transportation bottlenecks. $50,000 MLP Mergers & Acquisitions (US$ MM) $40,000 $30,000 $20,000 GP Consolidations Major Strategic Transactions Acquisitions $10,000 $ Source: Barclays Capital estimates YTD 18

19 Outlook In contrast to recent market action, the fundamental backdrop for MLPs remains quite strong, while current distributions within the sector are very attractive at a time when quality yield is scarce. The outlook for distribution growth is as bright as it has been in many years as funding remains readily and inexpensively available, project returns remain attractive, and MLPs continue to push forward with acquisitions and organic projects around developing shale plays and bottlenecks across the energy value chain. As highlighted in the last Quarterly Report, the Interstate Natural Gas Association of America (INGAA) projects a need for over $250 billion in capital investment directed towards natural gas and liquids infrastructure in the next 25 years. MLP valuations have again become unusually attractive. The median midstream MLP exited September yielding 7.03%, with spreads to 10-year Treasuries of 511 bps and to BBB credit of 262 bps, in each case more than 1 standard deviation wide of long run averages. Correspondingly, cash flow multiples have also become much more attractive. Volatility appears likely to persist for the time being, but from these dislocated levels of valuation, and with significant growth visibility, the outlook for MLP returns is as strong as it has been at any point since As investors move to take advantage of the compelling yield and growth characteristics available in the MLP space, which in normal circumstances provide the baseline value proposition for the group, we would expect at some point to see yield compression emerge to drive outsized total returns for investors willing to tolerate the interim volatility. We saw some of this compression develop in October, with strong distribution indications and calmer markets leading MLPs to a 10% monthly return, but there is lingering uncertainty in the overall macro picture. As such, we remain cautious in our near term outlook, but strongly positive on the longer-term picture. The table below outlines various 12-month total return scenarios, assuming different levels of distribution growth and exit yields. We are projecting a base case in the mid to high teens from September 30 th levels. Assumed Distribution Growth 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 12-month Exit Yield 6.00% 26.8% 27.4% 28.0% 28.7% 29.3% 29.9% 6.25% 22.0% 22.6% 23.2% 23.8% 24.4% 25.0% 6.50% 17.6% 18.2% 18.8% 19.3% 19.9% 20.4% 6.75% 13.5% 14.1% 14.6% 15.2% 15.7% 16.3% 7.00% 9.7% 10.3% 10.8% 11.3% 11.8% 12.4% 7.25% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 7.50% 2.9% 3.4% 3.9% 4.4% 4.9% 5.4% 19

20 MLP Quarterly Update Fourth Quarter, 2011 MLPs outperformed broader markets during the fourth quarter, particularly in December, to finish 2011 on a high note heading into Q1 earnings season. MLPs returned 14.6% for the quarter, on average, while the S&P 500 gained 11.2%, Energy was up 17.6%, REITs were up 12.6% and Utilities gained 7.1%. Fourth quarter performance brought MLPs in line with our beginning of year projection of mid-teen total returns for 2011, which was superior to the S&P, Energy, REITs and bonds, but trailed defensive Utilities. Midstream MLPs enter 2012 with a median yield of 6.2%, on average, though individual partnership yields vary widely. Current yields and spreads have come in from last quarter, but remain attractive, in our view. 4Q:2011 YTD Trailing 12 months Price TR v. AMZ Price TR v. AMZ Price TR v. AMZ AMZ 14.6% 16.3% - 7.3% 13.9% % 54.7% - SPX 11.2% 11.8% -4.5% 0.0% 2.1% -11.8% 12.8% 17.5% -37.2% S5ENRS 17.6% 18.2% 1.9% 2.8% 4.7% -9.2% 21.1% 26.1% -28.6% S5UTIL 7.1% 8.3% -8.1% 14.8% 19.9% 6.0% 15.8% 26.5% -28.2% FNR5 12.6% 14.0% -2.3% 4.7% 9.4% -4.4% 26.8% 38.7% -16.0% EXECUTIVE SUMMARY: PGS Energy Opportunities Trust returned 16.7% in Q4, 12.3% YTD The portfolio remains largely focused around core midstream MLPs, and closed Q4 with a yield of 6.8% after price appreciation in December pushed yield figures lower. Diversified Large Cap MLPs were the strongest performers this quarter, contributing 15.18% to performance on a gross basis. The Quarter in Review MLPs continue to benefit from favorable fundamentals, supportive capital markets and robust organic spending and acquisition activity. MLPs tracked broader markets for much of the quarter before beginning to decouple and outperform in December. While nearly all partnerships had positive returns, investors continued to reward distribution growth, with low-yield, high-growth MLPs clustered near the top of the performance rankings. Company-specific news with bearing on growth (i.e. project and acquisition announcements, guidance) was the primary return driver. The median midstream MLP yield at the end of December was 6.2%, which remains attractive in a yield-scarce environment. Distribution growth continues to accelerate. Outlook We remain cautious on broader markets, and expect episodes of volatility to persist, however we expect many of the same themes that worked for MLPs in 2011 to carry forward into Specifically, infrastructure growth in developing shale basins and transportation bottlenecks, and strong crude oil and natural gas liquids (NGL) economics, should remain supportive. With solid fundamental underpinning intact and strong momentum from 20

21 an ongoing multi-year energy infrastructure build-out, we see attractive current yields and accelerating distribution growth combining to result in another year of mid-teen total returns for MLPs. The Quarter in Review The Alerian Index returned 14.6% in price terms and 16.3% in total return during the fourth quarter, outperforming the S&P 500 (+11.2%), REIT 50 (+12.6%), S&P Utilities (+7.2%), but underperforming S&P Energy (17.6%). The median midstream MLP yield finished the quarter at 6.2%, 431 bps above 10-year Treasuries, which closed December at 1.88%. Incidentally, 188 bps is also the current MLP spread above BBB corporates. For context, the 10-year average spreads of Midstream MLPs to Treasuries and BBB corporates are 326 bps and 130 bps, respectively. MLP current yields and spreads have come in from last quarter, but remain attractive, particularly in light of accelerating distribution growth. With interest rates set to remain low through 2013 and investors bidding for yield across the board, we expect MLPs to receive support from incremental yield compression, while projected average cumulative distribution growth of 22%+ over the next 3 years increases the group s projected forward yield-to-cost above 7.5%. The top performing sectors this quarter were Diversified Large Cap (+23%) and General Partners (+22%), followed by Gathering & Processing (+15%) and Liquids Midstream (+13%). Diversified Large Cap MLPs, GPs and G&Ps were driven largely by positive outlooks, upward guidance revisions and NGL-focused project announcements. Liquids midstream 21

22 operators continue to see healthy volume increases and are enjoying additional tailwind from the new tariff escalator that took effect in July, equal to PPI for finished goods +2.65%. Note: PGS Distribution Growth Universe excludes new IPOs and certain special situation LPs Continuing the trend from the last several quarters, investors again showed a strong preference for growth over yield. Individual MLP yields have largely bifurcated along the lines of growth expectations, with high-growth partnerships yielding 4 to 5% and low/no growth partnerships yielding 7 to 8%. Outliers tend to be more speculative small cap MLPs. Could a growth trap be developing? We see several names that, while they may not deliver top tier distribution growth, have very solid distributions at relatively high yields. We would not be surprised to see some of these MLPs begin to quietly outperform while everyone else is chasing growth, especially if economic data surprises to the upside and we enter a sustained risk-on environment. 12% NRGY NMM MLP Current Yield v. Projected Growth 11% FGP 10% EXLP CLMT 9% MMLP BBEP Current Yield 8% 7% 6% 5% 4% SPH PSE ETP TCP VNR NRP NS BWP LGCY TGP PNG TOO RGP LINE APU BPL EEP ETE NSH DPM EVEP CPNO SEP EPD MMP SXL PVR WPZ OKS NGLS KMR GEL EPB KMP CHKM PAA ARLP WES CMLP MWE QRE AHGP XTEX 3% 2% 0% 5% 10% 15% 20% Projected Distribution Growth (3yr CAGR) Note: Relative size of bubbles represents the respective market cap of each MLP Distributions Update In line with our expectations, distribution growth continues to accelerate as cash flows from acquisitions and organic spending projects come online, with more partnerships electing to increase distributions, and higher growth rates, on 22

23 average. During quarterly earnings season in October and November, 31 partnerships increased distributions sequentially from Q3:11 levels and 47 had higher distribution run-rates year-over-year. The average change in sequential distributions was 1.3%, while the average Q/Q growth among those that increased distributions was 2.3%. Year-overyear, the average change was 5.7% across all partnerships and 6.7% among those that had increased distributions. Earnings season and new capex announcements have provided greater visibility into future distribution growth, which we are now estimating to average in the 7.5%+ range for 2012 and 7% for MLP Sequ en tia l Dist r ibu t ion Com ps Q1:11 Q2:11 Q3:11 Q4:11 Average 1.2% 1.4% 1.8% 1.3% Median 1.0% 1.0% 1.3% 0.9% # Increases Avg. Increase 2.0% 2.3% 2.6% 2.3% MLP Annual Distribution Comps Q1:11 Q2:11 Q3:11 Q4:11 Average 4.7% 4.7% 5.4% 5.7% Median 3.4% 3.7% 4.5% 4.8% # Increases Avg. Increase 6.1% 5.7% 6.4% 6.7% Note: PGS Distribution Growth Universe excludes new IPOs and certain special situation LPs Capital Markets Update Equity issuance picked back up in the fourth quarter after summer lull, with MLPs raising nearly $5 billion in 13 secondary offerings and 4 IPOs. Importantly, with capital budgets largely funded and few immediate financing needs, MLPs have been opportunistic in timing their issuances. Nearly half the total issuance this quarter (and 3 of 4 IPOs) came to market in December as MLPs took advantage of the strong market backdrop. This flexibility helps to boost project and acquisition returns over cost of capital and points to greater distribution growth visibility with lower associated risk. Debt issuance was quiet this quarter, with only four deals coming to market totaling $1.4 billion. The largest of these was MarkWest Energy Partners (MWE) $700 million 10-year note offering in October. The total issuance for 2011 comes to just under $19 billion in equity and close to $24 billion in debt, for a total of more than $42 billion a new annual record. 23

24 MLP Equity Issuance - Q4:2011 MLP Debt Issuance - Q4:2011 Price Amt. ($mm) Price Amt. ($mm) Term Coupon Amt. ($mm) 10/7/2011 MWE $ /2/2011 EEP $ /3/2011 NRP % 50 10/7/2011 RGP $ /6/2011 NS $ /25/2011 MWE % /2/2011 TGP $ /7/2011 NRGM* $ /15/2011 WPZ % /8/2011 ETP $ /8/2011 RRMS* $ /16/2011 APL % /8/2011 LGCY $ /8/2011 EPD $ /9/2011 PAA $ /13/2011 MWE $ /10/2011 LRE* $ /13/2011 PSE $ /15/2011 PVR $ /14/2011 MCEP* $ /1/2011 HEP $ * IPO TOTAL 4,593 TOTAL 1,400 Capital Spending Update MLPs continue to announce new projects and acquisitions at a robust pace, contributing to the visibility of future growth. Significant events this quarter include three major Marcellus Shale gathering acquisitions in December MarkWest Energy Partners (MWE) $1.8 billion acquisition of the remaining 49% interest in its Liberty Midstream joint venture, Chesapeake Midstream s (CHKM) $865 million dropdown acquisition of Appalachia Midstream Services from parent Chesapeake Energy (CHK), and Williams Partners (WPZ) acquisition of the Laser Northeast Gathering System for $750 million. Elsewhere, Plains All American (PAA) was notably active in the fourth quarter, announcing a $1.7 billion acquisition of BP s Canadian NGL business as well as a handful of smaller deals with combined value of approximately $620 million. Of course, the biggest of all deals in energy infrastructure was Kinder Morgan Inc. (KMI) proposed acquisition of El Paso Corp (EP), including EP s ownership of common units and the general partner of El Paso Pipeline Partners (EPB), for approximately $38 billion. The combined entity would be the largest pipeline operator and largest midstream company in North America. Along with the other mega deal of the year, Energy Transfer Equity s (ETE) $9.4 billion acquisition of Southern Union (SUG), which was approved by shareholders in December, the KMI/EP deal serves to highlight the value of the general partner interest, the cost of capital advantage inherent in the MLP structure, and the long term strategic importance of natural gas in the North American energy market. We expect acquisitions to remain an important source of growth going forward. Several drop-down stories remain active, and non-affiliated E&P C-corps will likely continue to shed midstream assets in order to fund drilling programs. One thing to watch out for on this front is the trend towards higher deal multiples, which is mitigated by the concurrent trend toward low cost of capital, but nonetheless has the potential to eat into overall rates of return. Source: Barclays Capital, Wells Fargo Securities, PGS estimates 24

25 Outlook We maintain a positive outlook for MLPs, especially as cumulative distribution growth drives price and yield accretion for long term investors. We remain cautious on broader markets for the time being, and expect episodes of volatility to persist as news on European debt negotiations, tensions in the Middle East and potentially rancorous US elections all have the potential to shake confidence in a still fragile economic recovery. We expect, however, that many of the same themes that worked for MLPs in 2011 will carry forward into Specifically, infrastructure growth in developing shale basins and transportation bottlenecks, and strong crude oil and natural gas liquids (NGL) economics, should remain supportive. With solid fundamental underpinning intact and strong momentum from an ongoing multi-year energy infrastructure build-out, we see attractive current yields and accelerating distribution growth combining to result in another year of mid-teen total returns for MLPs. Over time, as the sector continues to mature, we could see incremental yield compression emerge to drive outsized total returns for investors willing to tolerate the interim volatility. The table below outlines various 12-month total return scenarios, assuming different levels of distribution growth and exit yields. We are projecting a base case in the mid to high teens from December 31 st levels. Assumed Distribution Growth 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 12-month Exit Yield 5.0% 35.6% 36.2% 36.8% 37.5% 38.1% 38.8% 5.5% 23.8% 24.4% 25.0% 25.6% 26.2% 26.7% 5.8% 17.7% 18.3% 18.9% 19.4% 20.0% 20.5% 6.0% 14.0% 14.6% 15.1% 15.7% 16.2% 16.7% 6.2% 10.6% 11.1% 11.6% 12.1% 12.7% 13.2% 6.5% 5.8% 6.3% 6.8% 7.3% 7.8% 8.3% 7.0% -1.3% -0.9% -0.4% 0.1% 0.5% 1.0% 25

26 For more information please contact: Virginia R. Parker Managing Member and CIO Andrew Hryb Assistant Portfolio Manager 1177 Summer Street, 6 th Floor Stamford, CT Phone: (203) Fax: (203) andrew@parkerglobal.com Disclosures: Information contained in this report, including performance information, is obtained from sources that Parker Global Strategies considers to be generally reliable; however, the information may be subject to change, and no representation is made as to, and no responsibility or liability is accepted for, the accuracy or completeness of the information. Any reference to any specific security or index should not be considered as a buy/sell recommendation, solicitation or endorsement. Past performance is not indicative of future results. 26