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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

Investment Company Act file number 811-22958                

Duff & Phelps Select MLP and Midstream Energy Fund Inc.

 

(Exact name of registrant as specified in charter)

101 Munson Street

Greenfield, MA 01301

 

(Address of principal executive offices) (Zip code)

Jennifer Fromm, Esq.

Vice President, Chief Legal Officer, Counsel and Secretary for Registrant

One Financial Plaza

Hartford, CT 06103-4506

 

(Name and address of agent for service)

Registrant’s telephone number, including area code:  866-270-7788

Date of fiscal year end:  November 30

Date of reporting period:  May 31, 2020

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

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Item 1. Reports to Stockholders.

The Report to Shareholders is attached herewith.

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May 31, 2020
SEMIANNUAL REPORT
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s shareholder reports like this one will no longer be sent by mail, unless specifically requested from the Fund or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
You may elect at any time to receive not only shareholder reports but also certain other communications from the Fund electronically, or you may elect to receive paper copies of all future shareholder reports free of charge to you. If you own your shares directly with the Fund, you may make such elections by calling the Fund at 1-866-270-7788 or, with respect to requesting electronic delivery, by visiting www.virtus.com. If you own your shares through a financial intermediary, please contact your financial intermediary to make your request and to determine whether your election will apply to all funds in which you own shares through that intermediary.
Not FDIC Insured • No Bank Guarantee • May Lose Value

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MESSAGE TO SHAREHOLDERS
Dear Duff & Phelps Select MLP and Midstream Energy Fund Inc. Shareholder:
This semiannual report reviews the performance of the Duff & Phelps Select MLP and Midstream Energy Fund Inc. (DSE) for the six months ended May 31, 2020. It contains commentary from the portfolio management team at Duff & Phelps Investment Management concerning the U.S. energy market and the Fund’s performance during a challenging and unprecedented period for the energy sector.
For the six-month period, the Fund’s net asset value (NAV) declined 82.20%, including $0.15 in reinvested distributions, and its market price decreased 82.59%. For the same period, the Alerian MLP Index lost 24.26% and the average NAV performance of the Fund’s peer group, as represented by the Lipper Energy MLP Closed-End Fund Average, was (50.94%),1 including reinvested dividends.
Given the Fund’s low asset levels, the Board of Directors has recommended to shareholders that the Fund be liquidated. This proposal is subject to a shareholder vote scheduled for July 23, 2020. As of this writing, the Fund is continuing to be managed according to its mandate. Additional information about the proposed liquidation is contained in the “Management’s Discussion of Fund Performance” section of this report, and in proxy materials that have been mailed to shareholders.
On behalf of the Fund and its investment management team, I thank you for your business. If you have any questions about the proposed proxy vote or your account, our customer service team is ready to assist you at 866-270-7788 or through the closed-end fund section of Virtus.com.
Sincerely,
George R. Aylward
President, Chief Executive Officer, and Director
Duff & Phelps Select MLP and Midstream Energy Fund Inc.
July 2020
1Average NAV performance as calculated for the Lipper Energy MLP Closed-End Fund Average may differ from any constituent fund’s stated performance.
Performance data quoted represents past results. Past performance is no guarantee of future results, and current performance may be higher or lower than the performance shown above.
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DUFF & PHELPS SELECT MLP AND MIDSTREAM ENERGY FUND INC.
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited)
May 31, 2020
About the Fund:
The Duff & Phelps Select MLP and Midstream Energy Fund Inc. (NYSE: DSE) (the “Fund”) invests at least 80% of its Managed Assets in energy master limited partnerships (“MLPs”) and midstream energy companies that are not organized as MLPs. The Fund’s “Managed Assets” are equal to its net assets plus any outstanding preferred stock and/or borrowings made for the purpose of leverage. The Fund may invest up to 20% of its Managed Assets in securities of issuers either: (i) in the energy sector and that are not midstream energy companies or (ii) that produce products that are primarily for the use of companies in the energy sector (such as sand miners, certain chemical companies, and coking coal processors). The Fund’s investment objective is to seek a high level of total return resulting from a combination of current tax-deferred distributions and capital appreciation. There is no guarantee that the Fund will achieve its investment objective.
As of May 31, 2020, the Fund’s leverage consisted of $3 million of borrowings made pursuant to a line of credit which represented approximately 15% of the Fund’s total assets.
Manager Comments – Duff & Phelps Investment Management Co. (“DPIM”)
The Duff & Phelps Select MLP and Midstream Energy Fund Inc. is subadvised by Duff & Phelps Investment Management Co., and managed by a team of two dedicated MLP investment professionals with average industry experience of more than 23 years: David D. Grumhaus, Jr., Senior Portfolio Manager, and Rodney C. Clayton, CFA, Portfolio Manager. The following commentary is provided by the portfolio management team at DPIM, and covers the period from December 1, 2019 through May 31, 2020.
How did the markets perform during the Fund’s six months ended May 31, 2020?
The -24.3% return (as measured by the Alerian MLP Index) for the midstream energy sector for the first half of the fiscal year seems bad enough, but it does not even do justice to how poorly the sector performed. From January 16 to March 18, the sector fell an astounding 66.8%, driven by the combination of COVID-19, the Saudi-Russia oil price war, and extreme technical selling (which is selling based upon market signals that an asset is likely to decrease in price, rather than based upon an analysis of the asset’s inherent value) by Master Limited Partnership (MLP) closed-end funds. The price drop in March (-47%) was more than 2.5 times worse than the previous worst month since the sector’s inception back in 1996.
After a “Santa Claus” rally in mid-December 2019 and early January 2020, the midstream energy sector started to fade even before headlines about the coronavirus began to emerge from China in the second half of January. The Alerian MLP Index hit its high for the period on January 16, while the broader market did not peak until February 19. A big part of the driver was oil, which peaked at $63 in early January after moving up 13% during the fourth quarter of 2019. While the broader market was slow to understand the broader economic effects of COVID-19, it was quick to worry about the impacts of the coronavirus on Chinese oil demand, especially given the near-immediate curtailment of airline flights. The price of West Texas Intermediate (WTI) crude oil fell about $10 per barrel from its early January peak to the time when the market peaked, but then accelerated downward in late February and early March as the market went into full risk-off mode. Of course, this move was just a prelude to what was coming next. An OPEC meeting in early March was supposed to lead to a further cut in oil production. However, when
For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 7.
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DUFF & PHELPS SELECT MLP AND MIDSTREAM ENERGY FUND INC.
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
May 31, 2020
Russia refused to join Saudi Arabia in further oil curtailment, the Saudis immediately reversed course and announced a massive increase in production and exports in an effort to force curtailments in production across the world. Oil prices were cut in half, finishing March just above $20, and energy stocks plummeted.
Given their long-term contracts and significantly lower commodity exposure, midstream stocks should have been more insulated from the downfall than their Exploration & Production and Oil Services counterparts. However, once again, the midstream sector was plagued by its weak investor base. It was not just a lack of new buyers but, as the stocks fell, leveraged closed-end funds and hedge funds were forced to sell to meet applicable Investment Company Act restrictions and/or credit facility covenants, and selling begot more selling. Panic selling sent the Alerian MLP Index down 27.4% on March 9, followed by another 17.0% drop on March 12. There was simply nowhere to hide as any stock that started to outperform became the next source of funds for another desperate seller. Even the midstream C-corps, which had been steadily outperforming the MLPs since 2018, were not immune, as the Alerian Midstream Energy Index finished the month down 39.3%.
Finally, in late March, the forced selling started to abate. With the broader market also starting to rally off the bottom, investors were able to pause and see just how oversold the sector had gotten. While the economic recession caused by COVID-19 and stay-at-home orders will pressure midstream earnings, the likely earnings hit for the sector in 2020 and 2021 was more in the 10%-20% range, nowhere close to the 50% or even 80%-plus drop most stocks in the sector experienced. With the extreme technical selling over and even starting to reverse in April and May as closed-end funds started to re-apply leverage, midstream stocks rallied hard. Even the collapse in the price of April oil futures was not enough to stop the upward momentum. Midstream stocks had just become too cheap, leading to the sector more than doubling off the March lows through the end of May.
What factors affected the performance of the Fund during its fiscal six-month period?
The combination of the extreme sector sell-down and the Fund’s leverage caused the Fund to significantly underperform during the first half of the fiscal year. The Fund was down over 82% on both a net asset value (NAV) and market basis for the six months through May 31, 2020. The Alerian MLP Index, which serves as the Fund’s benchmark, declined 24.26% for the same period. Similar to its peers, the unprecedented drop in the stock prices of the Fund’s midstream energy holdings in March caused the Fund’s coverage under applicable Investment Company Act restrictions and credit facility covenants to drop significantly below the required levels. The sector’s 13.9% drop in February had already left the Fund’s balance sheet stretched, and the subsequent 59% sector drop over the next two and a half weeks simply overwhelmed the Fund. To get back into compliance with its covenants, the Fund paid back both its bank debt and preferred shares in March.
As discussed above, all of the stocks in the Fund’s portfolio were impacted by the poor sector performance. Every stock in the portfolio was down more than 50% from January 16 to March 18, with the more commodity-sensitive gathering and processing names down more than 80%. These stocks experienced big jumps in their stock prices by the end of the period as companies took steps to drastically increase their free cash flow by cutting capital expenditures and, in many cases, their distributions, and oil prices moved back into the mid-$30s as the U.S.
For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 7.
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DUFF & PHELPS SELECT MLP AND MIDSTREAM ENERGY FUND INC.
MANAGER’S DISCUSSION OF FUND PERFORMANCE (Unaudited) (Continued)
May 31, 2020
economy began to reopen. Nevertheless, even with the big bounce, as of the end of the period the sector was still down significantly on the year because of the magnitude of the March drop.
Given the losses experienced and the Fund’s very low asset levels, the Fund’s Board of Directors recommended to shareholders that the Fund be liquidated. This proposal is subject to an ongoing shareholder vote, and it remains unclear whether the vote will pass. In the meantime, the Fund is continuing to be run according to its mandate. The Fund has re-applied leverage through bank borrowing, although due to the Fund’s low asset levels, the amount of leverage available to the Fund is limited. The Fund also has pushed more heavily into the big, integrated C-corp midstream energy companies, as we believe that these companies will be the long-term winners in the sector. At the same time, the Fund has made sure to stay invested in some more commodity-sensitive midstream companies that we believe were unfairly punished during the selldown.
The preceding information is the opinion of portfolio management only through the end of the period of the report as stated on the cover. Any such opinions are subject to change at any time based upon market conditions and should not be relied upon as investment advice.
The Fund’s portfolio holdings are subject to change and may not be representative of the portfolio managers’ current or future investment decisions. The mention of individual securities held by the Fund is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional.
Risk Considerations
Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk.
MLPs: Investments in Master Limited Partnerships may be adversely impacted by tax law changes, regulation, or factors affecting underlying assets.
Energy Sector Concentration: The Fund’s investments are concentrated in the energy sector and may present more risks than if the Fund were broadly diversified over numerous sectors of the economy.
Closed-End Funds: Closed-end funds may trade at a discount or premium from their net asset values, which may affect whether an investor will realize gains or losses. They may also employ leverage, which may increase volatility.
For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 7.
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OUR PRIVACY COMMITMENT
Duff & Phelps Select MLP and Midstream Energy Fund Inc. recognizes that protecting the privacy and security of the confidential personal information we collect about you is an important responsibility. The following information will help you understand our privacy policy and how we will handle and maintain confidential personal information as we fulfill our obligations to protect your privacy. “Personal information” refers to the nonpublic financial information obtained by us in connection with providing you a financial product or service.
Information We Collect
We collect personal information to help us serve your financial needs, offer new products or services, provide customer service and fulfill legal and regulatory requirements. The type of information that we collect varies according to the products or services involved, and may include:
•  Information we receive from you on applications and related forms (such as name, address, social security number, assets and income); and
•  Information about your transactions and relationships with us, our affiliates, or others (such as products or services purchased, account balances and payment history).
Information Disclosed in Administering Products and Services
We will not disclose personal information about current or former customers to non-affiliated third parties except as permitted or required by law. We do not sell any personal information about you to any third party. In the normal course of business, personal information may be shared with persons or entities involved in servicing and administering products and services on our behalf, including your broker, financial advisor or financial planner and other service providers and affiliates assisting us.
Procedures to Protect Confidentiality and Security of Your Personal Information
We have procedures in place that limit access to personal information to those employees and service providers who need to know such information in order to perform business services on our behalf. We educate our employees on the importance of protecting the privacy and security of confidential personal information. We also maintain physical, electronic and procedural safeguards that comply with federal and state regulations to guard your personal information.
We will update our policy and procedures where necessary to ensure that your privacy is maintained and that we conduct our business in a way that fulfills our commitment to you. If we make any material changes in our privacy policy, we will make that information available to customers through our website and/or other communications.
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DUFF & PHELPS SELECT MLP AND MIDSTREAM ENERGY FUND INC.
PORTFOLIO HOLDINGS SUMMARY WEIGHTINGS (Unaudited)
May 31, 2020
The following tables present the portfolio holdings within certain
sectors or countries as a percentage of total investments as of May 31, 2020.
Country Weightings
United States 93%
Canada 6
Marshall Islands 1
Total 100%
Sector Weightings
Traditional Midstream   87%
Downstream/Other   12
Marine/Shipping   1
Total   100%
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