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Accessing the US Energy Revolution
Key points Accessing the US Energy Revolution
- Master Limited Partnerships (MLPs) have delivered a growth in their quarterly distributions since 2014 at an average coverage ratio of 1.25 in their latest quarterly results in Mar 2016 allaying concerns of distributions cuts by MLPs. (Source: Bloomberg, Individual MLP websites)
- The sustainability of the revenue stream of MLPs when compared to oil companies amidst the backdrop of volatile oil prices, highlights that MLPs would have offered a more resilient exposure to the energy sector.
- On analysing Distribution Coverage and EV/EBITDA, we believe MLPs offer an attractive value proposition.
- MLPs recent price performance is as a result of negative sentiment transpiring from equity markets and oil price volatility, evidenced by rising correlation 0.85 and 0.63 respectively. (Source: Bloomberg, ETF Securities) [correlation of monthly returns over 5 years]
- TICKER: MLPI LN Accessing the US Energy Revolution
Valuation
- 2016 expected distribution yield is 7.14% (Source: Bloomberg, ETF Securities)
- The majority of MLPs in our index have a distribution coverage above 1 which supports the case for sufficient cash flows available to pay distributions.
- Weighted average distribution paid in Q4 2015 have risen on average by 15% over the prior quarter despite the heightened concerns on the sustainability of distributions. In comparison the funds available for distribution have increased by 25% leaving a margin of 10% as a cushion for future distributions.
- Historically we have witnessed MLPs increase debt levels during periods of favourable valuation. However in 2014, despite valuations EV/EBITDA reaching their peaks, MLPs have not raised debt as aggressively as done in the past rendering them in a stronger balance sheet position.
(Click to enlarge) Source: Bloomberg, ETF Securities, Company websites
(Click to enlarge) Source: Bloomberg, ETF Securities
(Based on current basket historical data to mitigate survivorship bias)
(Click to enlarge) Source: Bloomberg, ETF Securities
(Based on current basket historical data to mitigate survivorship bias)
Performance
- Solactive continues to outperform its peers due to midstream focus and equal weighting methodology
- Solactive has outperformed crude oil over the past 5 years
- MLPs offer an inflation hedge due their long-term contracts which are regulated by the Federal Energy Regulatory Commission (FERC) and adjust to inflation annually (PPI), as well as distributions which adjust upwards according to changes in the CPI
(Click to enlarge) Source: ETF Securities, Bloomberg. The Solactive US Energy Infrastructure MLP Index is based on simulated data from 25 January 2011 to 4 March 2014 and actual data from 5 March 2014 to 31 March 2016.
(Click to enlarge) Source: ETF Securities, Bloomberg. The Solactive US Energy Infrastructure MLP Index is based on simulated data from 25 January 2011 to 4 March 2014 and actual data from 5 March 2014 to 31 March 2016.
(Click to enlarge) Source: ETF Securities, Bloomberg. The Yorkville MLP Infrastructure Universe Index TR is based on simulated data from 31 December 1996 to 15 February 2012 and actual data from 16 February 2012 to 31 March 2016.
Index recomposition March 2016
• Following the index recomposition, the representation of General Partner (GPs) has increased from 7% to 17%.
• Possible reasons:
o Undervaluation – GPs had the largest 6-month drawdown (June 15 – Jan 16) which has meant a higher expected future distribution yield.
o Alignment of interests – Owning GPs better align investors with management as most GPs own a stake (usually 2%) in their underlying LPs.
o Incentive distribution rights (IDRs) – GPs hold IDRs which entitle them to an increasing share of the total distribution released by the LP to its unitholders (in spite of a mere 2% ownership). As LPs increase their distribution to unitholders, the GP’s distribution increases proportionally much faster, in accordance with a pre-set IDR schedule. At the highest tier of the IDR schedule, a GP – through its IDR ownership – may be receiving up to 50% of equivalent cash distributions made to LP unitholders. This is known as IDR leverage. Thus IDRs have the power to significantly enhance the cash distribution profile of GPs. (IDRs are explained below)
• BAML Equity Research data shows that GPs have underperformed LPs on a total return basis but outperformed LPs on a cash distribution growth basis.
(Click to enlarge) Source: BAML Equity Research
(Click to enlarge) Source: Bloomberg, ETF Securities
(as at 17 April 2016)
Takeaways
- The average distribution coverage across the index is 1.25 which is comfortably above 1 and reflects sufficient cash flow to meet cash distributions
- The expected 2016 distribution yield is 7.14% backed by healthy fundamentals and oil price-resilient revenues (i.e. good cash flow)
- MLPs offer a good inflation hedge with distributions often outpacing the Consumer Price Index (CPI) and pipeline contracts that adjust for inflation annually (Producer Price Index = PPI)
- Funds for distribution are trading at a 10% premium to distributions paid so we may expect IDRs to gain value and give momentum to GP price performance
Important information
This communication has been provided by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
This communication is only targeted at qualified or professional investors.
• Bitcoin reverses sharply from oversold levels following the dovish FOMC meeting last week
• Our in-house “Cryptoasset Sentiment Indicator” has rebounded sharply from very bearish levels and currently signals neutral sentiment again
• Crypto hedge fund’s beta implies that crypto hedge funds have significantly increased their market exposure to Bitcoin from underweight to neutral levels over the past week
Chart of the Week
Performance
Last week, cryptoassets rebounded from very oversold levels as macro sentiment and risk appetite improved following the latest FOMC meeting.
More specifically, the Fed has started tapering its Quantitative Tightening by announcing that the limit of US Treasury bond redemptions will be reduced from 60 bn USD per month to 25 bn USD per month starting in June. The market interpreted this announcement as a signal that the Fed is inching closer towards an eventual monetary policy easing cycle.
The reversal in overall risk appetite was further supported by weak US labour market data that were released last Friday. Non-farm payroll growth came in well below consensus expectations and the US unemployment rate remained at cycle highs.
This increased the probability of looser monetary policy by the Fed which is bullish for cryptoassets.
As a result, Bitcoin rebounded sharply from very oversold levels in crypto sentiment.
We had already indicated that further downside was limited due to the very bearish levels in the Cryptoasset Sentiment Index .
Since then, we saw a very sharp reversal in crypto hedge fund’s beta that implies crypto hedge funds have on aggregate significantly increased their market exposure from underweight to neutral levels over the past week (Chart-of-the-Week).
Besides, there was also a sharp increase in whale BTC balances over the past week as well.
All in all, this implies that institutional investors seem to have bought the recent dip in cryptoassets.
Meanwhile, overall ETP fund flows into cryptoassets still remained relatively weak over the past week. A bright spot were the new Hong Kong spot Bitcoin and Ethereum ETFs that had a combined net inflow of around +224.1 mn USD last week. However, this was not enough to offset negative ETP flows in other jurisdictions, predominantly in the US.
In general, among the top 10 crypto assets, Avalanche, Toncoin, and Dogecoin were the relative outperformers.
However, overall altcoin outperformance vis-à-vis Bitcoin remained relatively low, with only around 45% of our tracked altcoins managing to outperform Bitcoin on a weekly basis.
Sentiment
Our in-house “Cryptoasset Sentiment Index” has rebounded sharply from very oversold levels. The index is currently signalling neutral sentiment again.
At the moment, 8 out of 15 indicators are above their short-term trend.
Last week, there were significant reversals to the upside crypto hedge fund’s beta to Bitcoin and global crypto ETP fund flows.
The Crypto Fear & Greed Index signals ”Greed” again as of this morning. It had shortly dropped to “Fear” levels last week.
Performance dispersion among cryptoassets has continued to decline amid the recent reversal in cryptoassets. Overall performance dispersion among cryptoassets remains relatively low.
Altcoin outperformance vis-à-vis Bitcoin was only moderate, with around 45% of our tracked altcoins that have outperformed Bitcoin on a weekly basis. At the same time, there was a slight underperformance of Ethereum vis-à-vis Bitcoin last week.
In general, increasing (decreasing) altcoin outperformance tends to be a sign of increasing (decreasing) risk appetite within cryptoasset markets.
Meanwhile, sentiment in traditional financial markets has not yet rebounded, judging by our own measure of Cross Asset Risk Appetite (CARA).
Fund Flows
Last week, we saw continued net outflows from global crypto ETPs with around -372.4 mn USD (week ending Friday) based on Bloomberg data.
A bright spot were the new Hong Kong spot Bitcoin and Ethereum ETFs that had a combined net inflow of around +224.1 mn USD last week according to data provided by Bloomberg. However, this was not enough to offset negative ETP flows in other jurisdictions, predominantly in the US.
Global Bitcoin ETPs continued to see net outflows of -409.1 mn USD of which -433.0 mn (net) were related to US spot Bitcoin ETFs alone. The newly issued Hong Kong spot Bitcoin ETFs were able to attract +156.2 mn USD in net inflows last week according to data provided by Bloomberg.
The ETC Group Physical Bitcoin ETP (BTCE) also saw net outflows equivalent to -15.2 mn USD last week.
The Grayscale Bitcoin Trust (GBTC) continued to experience net outflows of approximately -277.2 mn USD last week. That being said, last week Friday saw the very first daily net inflow into GBTC since its conversion to an ETF in January of around +63.0 mn USD which is a positive sign.
In contrast to Bitcoin ETPs, Global Ethereum ETPs saw a reversal in ETP flows last week, with net inflows of around +25.2 mn USD. This was mostly due to significant inflows into the newly issued Hong Kong spot Ethereum ETFs that were able to attract +67.9 mn USD last week, according to data provided by Bloomberg.
Meanwhile, the ETC Group Physical Ethereum ETP (ZETH) saw small net outflows (-0.9 mn USD). The ETC Group Ethereum Staking ETP (ET32) had neither share creations nor redemptions (+/- 0 mn USD) last week.
Besides, Altcoin ETPs ex Ethereum AuM’s were mostly stable last week with only minor net inflows of around +0.9 mn USD.
Besides, Thematic & basket crypto ETPs also experienced some net inflows of +10.6 mn USD, based on our calculations. The ETC Group MSCI Digital Assets Select 20 ETP (DA20) did experience neither in- nor outflows last week (+/- 0 mn USD).
Besides, the beta of global crypto hedge funds to Bitcoin over the last 20 trading rebounded sharply to around 0.97. This implies that global crypto hedge funds have significantly increased their market exposure and have currently a neutral exposure to Bitcoin.
On-Chain Data
Bitcoin’s on-chain data have continued to improve over the past week.
Short-term holders of bitcoin generally took losses as we declined below their costs basis at round 58k USD. So, there was a capitulation by short-term investors as the short-term holder spent output profit ratio (STH SOPR) reached the lowest level since March 2023. This tends to be a reliable signal for a short-term tactical bottom and also coincided with a generally very bearish sentiment.
Moreover, the increase in accumulation activity in Bitcoin that we had already observed the week prior has continued last week as well which put a floor below prices. What is more is that accumulation activity has even broadened to include larger wallet cohorts. Both very small and very large wallet cohorts currently seem to increase their wallet balances again judging by our own “average accumulation score”.
The average accumulation score aggregates individual accumulation scores across different wallet cohorts and shows the average balance growth across these different wallet cohorts.
The fact that larger wallet cohorts have started increasing their accumulation activity is also supported by the fact that wallets in excess of 100 BTC have significantly increased their purchases in the short term.
This is also corroborated by the fact that BTC whale net exchange flows have turned negative again over the past week with more outbound than inbound whale transfers from/to exchanges.
That being said, active addresses remain relatively weak and have declined towards year-to-date lows again. However, our own measure of overall Bitcoin network activity which includes active addresses, transaction count, UTXO count and block size remains near all-time highs.
Besides, Bitcoin’s hash rate still remains near all-time highs as miners still remain relatively unaffected by the recent halving of the block subsidy. BTC miners transfers to exchanges remain very low and overall miner balances are currently still moving sideways implying no significant selling by miners.
Overall, capitulation by short-term holders as well as broadening accumulation activity are a positive signal.
Futures, Options & Perpetuals
Last week, futures open interest continued to move sideways in BTC-terms and perpetual BTC futures only experienced a slight increase in open interest.
Despite the most recent price correction last week there were no significant futures long liquidations either. That being said, the BTC perpetual funding rate turned negative last week on Thursday and Friday which indicates oversold positioning and which tends to be a reliable signal for a short-term tactical bottom as well.
The Bitcoin futures basis mostly went sideways last week. It declined to new cycle lows during the latest price correction before reversing to around 9.3% p.a. again.
Bitcoin options’ open interest increased only slightly last week as BTC option traders seem to have increased their exposure to puts relative to calls. This was also evident in a short-term spike in relative put volumes.
Consistent with this observation, the 25-delta BTC 1-month option skew increased to levels last seen in January during the volatile US spot Bitcoin ETF trading launch.
Despite the dip to new lows in price, BTC option implied volatilities have only increased slightly. Implied volatilities of 1-month ATM Bitcoin options are currently at around 56.4% p.a., up from 54% p.a. the week prior.
Bottom Line
• Bitcoin reverses sharply from oversold levels following the dovish FOMC meeting last week
• Our in-house “Cryptoasset Sentiment Indicator” has rebounded sharply from very bearish levels and currently signals neutral sentiment again
• Crypto hedge fund’s beta implies that crypto hedge funds have significantly increased their market exposure to Bitcoin from underweight to neutral levels over the past week
To read our Crypto Market Compass in full, please click the button below
This is not investment advice. Capital at risk. Read the full disclaimer
Crypto Market Compass 6 May 2024
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