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Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: Attempting to Explain the Midstream Sell-Off – A Correlation Analysis
July 27, 2015

What's driving the recent MLP/midstream sell-off? Correlation analysis re-examined. Year-to-date, the Alerian MLP Index (AMZ/371.69) has meaningfully underperformed the broader equity market, declining 19.0%, relative to a 1.0% gain in the S&P 500. From its late August peak, the AMZ is off 31.2% and has seen yields expand by nearly ~35% (from ~5.1% to ~6.9% today). To make matters worse, the AMZ has even modestly underperformed other energy stock indices like the EPX (E&Ps are down 20.8% YTD) and the OSX (oil service names have declined 16.3% YTD) - all from an asset class widely thought to be less volatile (i.e., less commodity-price sensitive) than a generic energy stock! We believe underperformance of this magnitude has to be explained by multiple drivers. While there continues to be much speculation regarding those variables - again, most point to the correlation of MLPs to other energy stocks and, in turn, commodity prices - we believe the fear of rising interest rates, when paired with traditional production volumes/price realization worries, goes a long way toward explaining the severity of this selloff. This is even more pertinent upon recent commentary from the Fed, the rising value of the U.S. dollar, and the 10-year Treasury finally re-testing the 2.5% level less than a month ago. In today's Stat of the Week, we outline our analysis showing that the AMZ is more closely correlated to high-yield bonds than either WTI crude oil or the S&P 500, correlations between the EPX/OSX and the AMZ have increased as of late, and we lay out our future expectations for correlations between energy equities and commodity prices.