Cohen & Steers MLP & Energy Opportunity Fund

Transcription

1 The master limited partnership (MLP) and midstream energy market, as represented by the Alerian Energy Infrastructure Index, had a total return in U.S. dollars of 2.3% in the third quarter, bringing the year-to-date return to 1.1%. Investment Review Midstream energy companies, as measured by the Alerian Energy Infrastructure Index, rose in the third quarter as improving crude oil prices outweighed generally disappointing earnings results and a number of guidance reductions from management teams. We also saw some notable distribution cuts as some firms continue to take steps to de-lever their balance sheets and improve distribution coverage. In the "bad news is good news" vein, although the announcements of such moves typically resulted in near-term price weakness, we believe that in many instances they are a long-term positive for the companies. Capital appeared to be readily available through the public equity and debt markets, with a growing amount of interest and capital deployment from private equity funds. The midstream industry appears to have suffered negligible long-term damage from Hurricane Harvey. The storm and subsequent flooding resulted in the tragic loss of lives and widespread property damage, particularly in the Houston region the heart of U.S. energy production but only temporarily disrupted operations for midstream companies in Index Performance (US$) Alerian Energy Infrastructure Index Alerian MLP Index Q % -3.05% YTD 1.11% -5.62% 1 Year 4.75% -3.70% 3 Year -4.47% % 5 Year 6.36% -0.57% Data quoted represents past performance, which is no guarantee of future results. This information is not representative of any Cohen & Steers account and no such account will seek to replicate an index. You cannot invest directly in an index and index performance does not reflect the deduction of fees, expenses or taxes. Periods greater than 12 months are annualized. the region. Stronger Energy Demand Lifts Oil Prices Oil prices climbed to their highest level since July 2015 amid stronger-than-expected demand from Europe and the U.S. and falling stockpiles. The International Energy Agency reported that second-quarter global oil demand grew by 2.3 million barrels per day (mbpd), the highest year-over-year increase in two years. While demand is rising, global stockpiles continue to decline, causing prices for oil futures for near-term delivery to move above longer-dated contracts (i.e., backwardation). This could make it more attractive to sell oil immediately rather than storing it and could push oil stocks even lower in coming months. Also, there were signs of increased willingness of OPEC suppliers to extend production cuts if inventory levels and/or the oil price do not meet the group's targets. Rising Energy Exports Boosting Midstream Companies Rising exports of liquefied natural gas (LNG) proved beneficial for marine shipping and select pipeline companies during the quarter, a trend we expect will continue. Exports of LNG have grown from essentially nothing in early 2016 to an average of more than 56 billion cubic feet per month in recent months. Global demand for LNG is supported by competitive prices relative to crude oil, particularly in Asia. And with more LNG export facilities under construction, the U.S. is expected to become a net exporter of natural gas on an average annual basis by Midstream energy companies also benefited from U.S. shale oil garnering a greater share of global production. Rising shale oil exports averaged nearly a million barrels per day in the first six months of 2017 triple the amount shipped abroad in the same period just three years ago. China is a fast growing destination for these exports. U.S. oil deliveries to the country now exceed shipments from several OPEC members. Evolving Business Model Reshaping Industry Dynamics Midstream energy companies continue to move toward a more utility-like capital allocation model, a trend that we believe holds the potential to return significant value to shareholders as it will reduce reliance on capital markets and improve confidence in current distribution. As a sign of this trend, Kinder Morgan recently announced a $2 billion stock buyback program for , the first major buyback in the midstream energy space. We believe this is a prudent method of returning capital as opposed to maximizing the distribution payout. Kinder is able to take these shareholder-friendly steps because it was an early mover in simplifying its organizational structure, strengthening its balance sheet and reducing its cohenandsteers.com

2 reliance on the capital markets to fund growth. As part of this process, the company eliminated its general partner/limited partner structure (and with it, costly incentive distribution rights). By removing the structure, the company opened the door to share buybacks, providing it with greater flexibility to return capital to unitholders. We believe Kinder's buyback decision may encourage other companies to take similar steps. Re-contracting Upending Growth Assumptions A cycle of pipeline contract re-negotiations is getting underway, which may have positive and negative repercussions for the midstream industry. Natural gas pipelines typically are contracted for terms of 10 or more years, which mean that many of the pipelines built between 2008 and 2010 will be coming up for contract renewal between now and Midstream companies that built new pipelines in the early stages of the shale boom generally locked in high cash flows through contracts that guaranteed payments regardless of pipeline utilization at a time when gas prices and basis differentials were significantly higher than they are today. Yet many of these pipelines never reached full capacity and production in some basins, including the Barnett, Fayetteville, Haynesville and Woodford, has subsequently declined. This renewal cycle is potentially an opportunity for companies with pipelines in key areas that may benefit from favorable pricing differentials that did not exist a few years ago for instance, where there is growing demand for natural gas on the Gulf Coast to supply LNG export facilities. Conversely, some midstream companies may be forced to significantly lower their cash flow projections, as once-valuable pipelines in basins that are now oversupplied with energy infrastructure renew contracts at lower future volumes and rental fees, if they are renewed at all. This highlights the importance of security selection in coming years. Sector Highlights Gathering & processing (4.3% total return 1 ), one of the more commodity-price-sensitive sectors, displayed a wide dispersion in security returns. Tallgrass Energy GP rose sharply as its MLP, Tallgrass Energy Partners, announced several acquisitions that will boost the general partner's cash flow. Western Gas Partners declined on speculation that its growth may slow after its sponsor, Anadarko Petroleum, signaled an increased focus on valuation creation and return on invested capital. Among natural gas pipelines (0.7%), TransCanada rose on strong earnings results, while Cheniere Energy Partners declined in part on concerns that India's largest LNG importer was attempting to renegotiate contracted prices at Cheniere's liquefaction facilities. In the diversified sector (0.6%), Pembina Pipeline continued to progress in its merger with Veresen. Oneok, which has assets in the Bakken shale, rose on firming crude oil prices. Crude/refined products ( 0.8%) generally benefited from rising oil prices, but the sector also saw declines in a number of issues. Plains All American fell after the company surprised the market with a second distribution cut. Buckeye Partners was hurt by lower utilization of its storage assets and on concerns about pipeline contracts coming up for renewal. Fund Performance The Fund had a positive total return but lagged its benchmark in the quarter. Security selection in the crude/refined products sector detracted from relative performance. We were underweight SemGroup, which rose despite increasing its balance sheet leverage with the acquisition of the Houston Fuel Oil Terminal Company. We did not own Inter Pipeline, which after underperforming in the first half of the year, rebounded as commodity prices recovered. Stock selection in natural gas pipelines also detracted from relative performance, although this was partially offset by our allocation in the sector. Out-of-index Cheniere Energy and Cheniere Energy Partners declined as some investors worried that Gail India would seek to revise contract terms which we do not believe will be successful. Stock selection and our underweight in diversified utilities further hindered relative performance. In an environment of flat interest rates, utilities traded at increasingly higher valuations, but we remain underweight the sector due to its relatively limited exposure to midstream energy fundamentals and its interest-rate sensitivity. Our out-of-index allocation to the marine shipping/offshore sector (8.3% total return) contributed to relative performance. The sector benefited from rising crude oil prices, which increases the attractiveness of alternative fuels such as LNG and could boost the sector's fundamentals. Stock selection in gathering and processing also contributed. Out-of-index holding Noble Midstream Partners rose sharply after increasing its distribution and reporting better-than-expected earnings. Also, we chose not to own Keyera and Enlink Midstream, both of which declined modestly. Stock selection in diversified midstream companies additionally contributed, although this was partially offset by an overweight in the sector. Out-of-benchmark holding Kinder Morgan Canada benefited from reduced regulatory concerns cohenandsteers.com _F_Q317

3 following the outcome of the election in British Columbia, as well as from plans to expand its Trans-Mountain pipeline. Investment Outlook We believe crude oil prices will remain range-bound between the mid-$40s to high-$50s per barrel. This range is supported on the low end by production cuts from OPEC and its partners. The oil price is likely bounded on the upper end by relatively low-cost supply and short-cycle from North American producers taking market share of global energy production. The growth in North American oil volumes is driving a positive shift in the fundamental cycle for midstream energy companies, translating into improving cash flows, which we believe will eventually lead to a re-acceleration of distribution growth. We find it encouraging that more companies are taking steps to reduce their downside risk by strengthening balance sheets and increasing distribution coverage ratios, and being less reliant on capital markets to fund their growth. North American volume growth favors gathering & processing and natural gas pipelines. We continue to overweight companies that have high-quality assets located in the basins that may benefit from accelerating production growth. Specifically, we favor companies with gathering and pipeline assets in the Marcellus Shale region (Pennsylvania-Ohio) and the Permian Basin (West Texas). Futures price curve could weigh on crude/refined products sector. Rising demand for crude oil may cause prices for future delivery to continue to decline relative to near-term contracts. This, in turn, may reduce demand for storing the commodity, which could adversely affect the crude/refined products sector. Offsetting this potential negative, however, is strong demand for refined products, as seen in U.S. vehicle miles traveled at a seasonally adjusted all-time high and an absolute record as well. Marine shipping/offshore to benefit from U.S. exports. We believe U.S. energy policy is supportive of continued growth in energy exports. We also see opportunities arising from increasing demand for natural gas in Asia and Europe, which has been replacing coal in many cases. In our view, companies with "dock capacity" stand to benefit as infrastructure networks are expanded to export both liquefied natural gas and liquefied petroleum gas. (1) All sector returns in this commentary are in local currencies. Sector classification of securities in the index is determined by the investment advisor. As of September 30, 2017, SemGroup, Inter Pipeline, Cheniere Energy, Cheniere Energy Partners, Noble Midstream Partners, Keyera, Enlink Midstream and Kinder Morgan Canada accounted for 0.0%, 0.0%, 2.8%, 1.0%, 1.2%, 0.0%, 0.0% and 1.1% of the Fund, respectively. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice. Weights may vary over time and holdings are subject to change without notice. Data quoted represents past performance, which is no guarantee of future results. The Alerian Energy Infrastructure Index is a tier-weighted index of 30 core North American energy infrastructure companies that engage in the pipeline transportation, storage, and processing of energy commodities. The Alerian MLP Index is a float-adjusted, market-capitalization-weighted index that consists of the 50 most prominent large- and mid-cap energy master limited partnerships. The views and opinions in the preceding commentary are as of the date of publication and are subject to change. There is no guarantee that any market forecast in this report will be realized. This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict the performance of any investment. Please consider the investment objectives, risks, charges of any Cohen & Steers fund carefully before investing. A summary prospectus and prospectus containing this and other information can be obtained by calling Please read the summary prospectus and prospectus carefully before investing. Cohen & Steers open-end funds are distributed by Cohen & Steers Securities, LLC. This commentary is authorized for distribution only when preceded or accompanied by the current fact sheet for. cohenandsteers.com _F_Q317

4 Factsheet September 30, 2017 The investment objective of the Fund is to provide attractive total return. The Fund seeks to achieve its investment objective through investments in energy-related master limited partnerships (MLPs) and securities of companies that derive at least 50% of their revenues or operating income from the exploration, production, gathering, transportation, processing, storage, refining, distribution or marketing of natural gas, natural gas liquids (including propane), crude oil, refined petroleum products, coal or and other energy resources. General Information CUSIP Symbol A Shares 19249F107 MLOAX C Shares 19249F206 MLOCX I Shares 19249F305 MLOIX R Shares 19249F503 MLORX Z Shares 19249F404 MLOZX NAV per Share (Class A) $8.39 Total Net Assets $104.3 Million Number of Holdings 47 Dividend Frequency Quarterly Expense Ratio Gross (Class A) 2.22% Expense Ratio Net (Class A) 1.46% Expense Ratio Gross (Class A): 2.22%; Expense Ratio Net (Class A): 1.46% - As disclosed in the April 1, 2017 prospectus. Cohen & Steers Capital Management, Inc., the Fund's investment advisor (the "Advisor"), has contractually agreed to waive its fee and/or reimburse expenses through June 30, 2019 so that the Fund's total annual operating expenses (excluding acquired fund fees and expenses, taxes and extraordinary expenses) do not exceed 1.45% for Class A shares. Absent such arrangements, returns would have been lower. This contractual agreement can be amended at any time by agreement of the Fund and the Advisor and will terminate automatically in the event of termination of the investment advisory agreement between the Advisor and the Fund. Portfolio Managers Managing Years of Fund Since Experience Robert Becker Inception 22 Benjamin Morton Inception 19 Tyler Rosenlicht Total Returns Alerian Energy Excluding Sales Including Sales Infrastructure Charge Charge (1) Index Alerian MLP Index QTD 1.37% -3.20% 2.34% -3.05% YTD -0.52% -5.00% 1.11% -5.62% 1 Year 1.35% -3.21% 4.75% -3.70% 3 Year -9.05% % -4.47% % Since Inception (12/20/13) -1.05% -2.24% 1.87% -5.08% (1) Maximum 4.5% sales charge; returns for other share classes will differ due to differing expense structures and sales charges. Data quoted represents past performance, which is no guarantee of future results. Performance returns stated net of fees. There is no guarantee that any historical trend illustrated in this report will be repeated in the future, and there is no way to predict when such a trend will begin. There is no guarantee that any market forecast in this report will be realized. Current performance may be lower or higher than the performance quoted. The investment return and the principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Periods greater than 12 months are annualized. Returns are historical and include change in share price and reinvestment of all distributions. Month-end performance information can be obtained by visiting our website at cohenandsteers.com. There is no guarantee that any investment objective will be achieved. An investor cannot invest directly in an index, and index performance does not reflect the deduction of fees, expenses or taxes. During certain periods presented above, the Advisor waived fees and/or reimbursed expenses. Without this arrangement, performance would be lower. Sector Diversification 41% Diversified 17% Crude / refined products 16% Gathering & processing 12% Natural gas pipelines 6% Diversified utilities 5% Other 4% Marine shipping / offshore Portfolio weights are subject to change without notice. Due to rounding, values might not add up to 100%. Other includes Other Assets, Cash and Compression. Geographic Diversification 78% United States 20% Canada 2% Other Portfolio weights are subject to change without notice. Due to rounding, values might not add up to 100%. Other includes Cash and Norway. cohenandsteers.com

5 cohenandsteers.com OFS14 Q317 Factsheet September 30, 2017 Cohen & Steers is a global investment manager specializing in liquid real assets, including real estate securities, listed infrastructure, commodities and natural resource equities, as well as preferred securities and other income solutions. Founded in 1986, the firm is headquartered in New York City, with offices in London, Hong Kong, Tokyo and Seattle. Risks. There are special risks associated with investing in the Fund. Since the Fund concentrates its assets in global infrastructure securities the fund will be more susceptible to adverse economic or regulatory occurrences affecting global infrastructure companies than an investment company that is not primarily invested in global infrastructure companies. Infrastructure issuers may be subject to regulation by various governmental authorities and may also be affected by governmental regulation of rates charged to customers, operational or other mishaps, tariffs and changes in tax laws, regulatory policies and accounting standards. Special risks of investing in foreign securities include (i) currency fluctuations, (ii) lower liquidity, (iii) political and economic uncertainties, and (iv) differences in accounting standards. Certain foreign securities may represent small- and medium-sized companies, which may be more susceptible to price volatility and less liquid than larger companies. The Fund is classified as a "non-diversified" fund under the federal securities laws because it can invest in fewer individual companies than a diversified fund. However, the Fund must meet certain diversification requirements under the U.S. tax laws. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT INSURED BY ANY GOVERNMENT AGENCY Top Ten Holdings Name The Williams Companies Inc. % of Market Value 7.4% Oneok Inc. 6.7% Pembina Pipeline Corp. 6.4% Kinder Morgan Inc. 6.0% TransCanada Corp. 5.1% Enterprise Products Partners 4.5% Energy Transfer Equity Lp 4.3% MPLX LP 3.8% Tallgrass Energy GP LP 3.1% Targa Resources Corp. 3.0% The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice. Weights may vary over time and holdings are subject to change without notice. Please consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. A summary prospectus and prospectus containing this and other information may be obtained by visiting cohenandsteers.com or by calling Please read the summary prospectus and prospectus carefully before investing. The Fund may pay distributions in excess of its net investment company taxable income, and this excess would be a return of capital distribution from the Fund's assets. The estimated composition of each distribution, including any return of capital, will be provided to shareholders of the record and is also available at cohenandsteers.com. Please note that these estimates may change substantially by year-end due to portfolio activity and tax recharacterizations, and shareholders will be notified following year-end regarding the final composition of all distributions via Form 1099-DIV. The Alerian Energy Infrastructure Index is a tier-weighted index of 30 core North American energy infrastructure companies that engage in the pipeline transportation, storage, and processing of energy commodities. The Alerian MLP Index is a float-adjusted, market-capitalization-weighted index that consists of the 50 most prominent large- and mid-cap energy master limited partnerships. 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. MLPs may trade less frequently than larger companies due to their small capitalizations which may result in erratic price movement or difficulty in buying or selling. A significant portion of the Fund's distributions will consist of return of capital for U.S. federal tax purposes, which reduce a shareholder's adjusted cost basis in the Fund's shares and impacts the amount of any capital gains or loss realized by the shareholder upon selling the Fund's shares. Once a shareholder's adjusted cost basis has been reduced to zero (due to return of capital), any further return of capital will be treated as a capital gain. MLPs may have additional expenses, as some MLPs pay incentive distribution fees to their general partners. The value of MLPs depends largely on the MLPs being treated as partnerships for U.S. federal income tax purposes. If MLPs were subject to U.S. federal income taxation, distributions generally would be taxed as dividend income. As a result, after-tax returns could be reduced, which could cause a decline in the value of MLPs. If MLPs are unable to maintain partnership status because of tax law changes, the MLPs would be taxed as corporation and there could be a decrease in the value of the MLP securities. An investor cannot invest directly in an index, and index performance does not reflect the deduction of fees, expenses or taxes. This fact sheet is provided for informational purposes and is not an offer to purchase or sell Fund shares. Cohen & Steers U.S. registered open-end funds are distributed by Cohen & Steers Securities, LLC, and are only available to U.S. residents.