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Charting Opportunity in Midstream Energy

North American oil and gas production will likely be a critical input to the global growth engine, and the midstream sector underpins this growth.

The figure is a line graph showing of the price of West Texas Intermediate (WTI) crude oil for a five-year period ended 31 December 2018. The trailing 12-month EBITDA (earnings before interest, taxes, depreciation, and amortization) for midstream energy companies is superimposed, represented by a shaded region. Crude prices hover around $100 a barrel in 2014 before plummeting to a new range of roughly $35 to $80 the rest of the period. Yet over the entire time, EBITDA increases steadily from about $27 billion in early 2014, to about $48 billion at the end of 2018.

With the balance sheet and financing challenges that had plagued the midstream sector since 2014 now largely in the rearview mirror, we believe oil and gas master limited partnerships (MLPs) appear poised to capitalize on the North American energy renaissance. Earnings for midstream energy companies have continued to rise despite volatility in oil prices, as the chart shows, reflecting their lower correlation to oil prices, greater exposure to production volume and ability to generate predictable revenue streams from long-lived assets. With demand for oil and natural gas likely to remain robust, we believe midstream energy now offers one of the more attractive secular growth stories among all asset classes, with support from a favorable – and much improved – entry point.

For more on our outlook on MLPs and midstream energy, see “Tapping Opportunity in Oil and Gas Infrastructure.”

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John M. Devir

Portfolio Manager and Head of Americas Credit Research

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PIMCO Europe Ltd
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London W1U 3AH, England
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Past performance is not a guarantee or a reliable indicator of future results. 

All investments contain risk and may lose value. Investing in MLPs involves risks that differ from equities, including limited control and limited rights to vote on matters affecting the partnership. MLPs are a partnership organized in the US and are subject to certain tax risks. Conflicts of interest may arise amongst common unit holders, subordinated unit holders and the general partner or managing member. MLPs may be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuer’s financial condition, or unfavorable or unanticipated poor performance of a particular issuer. MLP cash distributions are not guaranteed and depend on each partnership’s ability to generate adequate cash flow. Many MLPs and other energy companies operate natural gas, natural gas liquids, crude oil, refined products, coal, or other facilities within the energy sector. As a result, they are susceptible to adverse economic, environmental, or regulatory occurrences affecting that sector. Midstream MLPs and other entities that provide crude oil, refined product and natural gas services are subject to supply and demand fluctuations in the markets they serve, which may be impacted by a wide range of factors including fluctuating commodity prices, weather, increased conservation or use of alternative fuel sources, increased governmental or environmental regulation, depletion, rising interest rates, declines in domestic or foreign production, accidents or catastrophic events, and economic conditions, among others. Concentration of assets in one or a few sectors may entail greater risk than a fully diversified portfolio and should be considered as only part of a diversified portfolio.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.