Last week I received a news alert that highlighted the extent of the current bear market in energy stocks. Typically, late in a business cycle and with a potential recession on the horizon, some sectors that tend to fare well are utilities, real estate, and energy. That has been the case with the utilities and real estate sectors, as they are two of the top-performing S&P 500 sectors over the past year.
But the sell-off in energy has been brutal. Market data provider FactSet sent an alert last week that showed how many companies in various sectors were setting new 52-week highs and lows. The energy sector, in particular, stood out:
Note that while 95% of the 52-week marks in the utilities and real estate sectors were highs, that mark was 0% in the energy sector. Further, the energy sector had far more new 52-week lows than any other sector, with 42.
The most recent sell-off in the energy sector is a result of a plunge in oil prices brought on by the latest threats of tariffs in the ongoing trade war with China. The energy sell-off has been indiscriminate, taking down healthy and unhealthy companies and segments alike. It has even hit one of the healthiest sectors this year — the master limited partnerships (MLPs) — which consist largely of the companies that transport and store oil and gas.
Alerian is an independent provider of energy infrastructure and MLP market intelligence. Its benchmarks are widely used to analyze relative performance of the MLP sector. Alerian’s latest research note looks at distribution coverage for the 22 constituents of the Alerian MLP Infrastructure Index (AMZI). For context, the AMZI represented 94% of the total midstream MLP market capitalization as of the end of July.
Distribution coverage is one of the most important metrics for determining an MLP’s financial health. Distribution coverage compares distributable cash flow (DCF) generated in a period to the total cash distributions paid for that period. A coverage ratio below 1.0x means that a company didn’t generate enough cash in the period to cover its distribution. If coverage consistently falls below 1.0x, the MLP may have to cut its distribution.
Alerian’s recent research note compared distribution coverage for the 22 AMZI constituents in the second quarter of 2018 versus the second quarter of 2019: