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

Virtus Investment Partners, Inc.

One Financial Plaza

Hartford, CT 06103

(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: November 30, 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.

 

 

 


Item 1.

Reports to Stockholders.

 

  (a)

The Report to Shareholders is attached herewith.

 

  (b)

Not applicable.



November 30, 2020
ANNUAL 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. If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action.
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




MESSAGE TO SHAREHOLDERS
Dear Duff & Phelps Select MLP and Midstream Energy Fund Inc. Shareholder:
This annual report reviews the performance of the Duff & Phelps Select MLP and Midstream Energy Fund Inc. (DSE) for the 12 months ended November 30, 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.
The fiscal year saw the spread of coronavirus, severe market turbulence, and a shocking collapse in the price of oil. The effects of the Russia-Saudi oil conflict, combined with the global pandemic, led to a severe downturn in the MLP and midstream energy sectors.
For the 12-month period, the Fund’s net asset value (NAV) returned (82.69%), including $0.15 in reinvested distributions, and its market price returned (85.09%). For the same period, the Alerian MLP Index returned (24.50%) and the average NAV of the Fund’s peer group, as represented by the Lipper Energy MLP Closed-End Fund Average, was (49.71%),1 including reinvested dividends.
The extreme selloff in the energy market forced the Fund into heavy selling to pay down leverage. Left with a significantly smaller asset base and less leverage than when the selloff began, the Fund was unable to recover to the same degree as its benchmark index when the sector’s partial rebound began. Given the Fund’s low asset levels, the Board of Directors recommended to shareholders that the Fund be liquidated, but that proposal was not approved by shareholders. As of this writing, the Fund continues to be managed according to its mandate.
On behalf of the Fund and its investment management team, I thank you for entrusting your assets to us. If you have any questions about the Fund 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.
January 2021

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)
November 30, 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 November 30, 2020, the Fund’s leverage consisted of $3 million of borrowings made pursuant to a line of credit which represented approximately 16% 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 November 30, 2020.
How did the markets perform during the Fund’s fiscal year ended November 30, 2020?
Stable energy markets depend on the forces of supply and demand finding relative balance, but two seismic developments made the fiscal year ended November 30, 2020, one of the most difficult periods on record for the energy sector. During the period, midstream energy stocks fell 24.5%, as measured by the Alerian MLP Index, and massively underperformed the broader S&P 500® Index. The first quarter of the fiscal year started with a strong rally of the sort that has become commonplace for the midstream sector in the months of December and January. The rally began to fade around mid-January as the market began to worry about the impact of COVID-19 on Chinese energy demand, and the selloff deepened in February as the global reach of the virus became clearer. By the end of the first quarter of the fiscal year (through February 28, 2020), the Alerian MLP Index had fallen 12%.
In March, governments across the world were orchestrating coordinated shutdowns of their economies in order to control the spread of the virus. As estimated by some observers, this ultimately drove a sharp decline of over 26 million barrels per day in oil demand at the trough, amounting to roughly 25% of global petroleum consumption. This represented the greatest demand shock in modern times.
Around the same time, OPEC and allied countries (OPEC+) met in early March to address severe oversupply in crude oil markets, but members were unable to find consensus on a strategy. With key participants Saudi Arabia and Russia advocating for diametrically opposite
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)
November 30, 2020
actions, these two countries effectively launched a price war for market share that pushed the U.S. West Texas Intermediate (WTI) crude oil benchmark down 45% over the following two weeks.
This period was disastrous for midstream energy stock performance, and there was nowhere to hide. The Alerian MLP Index fell nearly 60% from the start of March to its bottom around mid-month. Selling pressure was relentless and indiscriminate, exacerbated by the unwinding of many master limited partnership (MLP) closed-end funds, most of which had taken on leverage to amplify their buying power, as well as hedge funds.
With demand in apparent free fall and Saudi Arabia flooding the markets with additional crude that could not be absorbed, every nook and cranny of global storage started to rapidly fill. Production needed to decline, deeply and immediately, and the world was waiting on U.S. shale producers to blink. With storage approaching tank tops, the WTI crude index briefly went into negative territory, closing below -$37 per barrel in late April, before returning to positive territory. It closed the month at just under $19 per barrel.
Surprisingly, midstream energy stocks rose sharply beginning in late March, as closed-end fund liquidations ended and savvy investors stepped up, understanding that the stocks had been oversold. The Alerian MLP Index rallied 109% from the bottom in March through the end of May, but this still left the index down 24% for the fiscal year to date.
With crude oil prices far below the cash cost to operate wells, shale producers took the first step toward rebalancing the market. They not only halted all new drilling, but even curtailed wells that were already online and flowing, which pushed U.S. production into decline. Then Saudi Arabia and Russia came back together to broker the largest production cut in OPEC history, removing roughly 9% of global supply. With the necessary supply response in place and demand losses bottoming out, crude oil prices rebounded to $40 per barrel by the end of July. And with oil prices back above the cash cost, producers brought shut-in volumes back online, improving the near-term outlook for midstream companies. However, midstream energy stocks lost the positive momentum and fell another 22% through September, when the market came to realize that the pandemic would go on far longer than most had envisioned, and with political polls indicating rising odds of a Democratic Party sweep in the upcoming U.S. election.
Midstream energy stocks found new life over the final two months of the fiscal year, rising 28%. Most of that strength came in November, following an apparent split-party result in the U.S. election and several announcements of strong COVID-19 vaccine trial results. Investor focus seemed to shift toward positioning for a potential recovery, and the energy sector began to lead, rather than lag the broader market. This also helped lift oil prices, with WTI ending the fiscal year at just over $45 per barrel, down 18% on the fiscal year but up roughly $10 per barrel over the final month.
Despite the broad-based carnage in the sector, there were still relative winners and losers, with trading activity becoming more discriminate as the pandemic wore on. First, the market showed a clear preference for the strongest balance sheets. Companies slashed their capital expenditure (capex) budgets and reduced operating and overhead expenses, accelerating a pivot to free cash flow generation that had been forming prior to the pandemic. But companies with too much debt were forced to go a step further, slashing their dividends and distributions. Those companies earliest to take action saw their stock prices rebound more quickly.
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)
November 30, 2020
Asset mix also led to select opportunities for well-positioned companies. Natural gas and natural gas liquids (NGL) prices actually rose during the year, benefitting companies with assets in the Marcellus/Utica regions and those with NGL export facilities. A significant quantity of these commodities are produced alongside crude oil in key shale basins, so the sharp decline in crude oil production also resulted in lower volumes and higher prices for natural gas and NGLs. Owners of crude oil storage also benefitted, as the short-term oversupply condition created a window for operators to fully contract those facilities with substantial tariff increases. Generally, the stocks that were more challenged during the fiscal year represented gathering and processing companies, those with volumetric exposure to crude oil and refined product pipelines, and companies whose balance sheets remained stretched even after dividend/distribution cuts.
While pandemic-related impacts largely drove sector performance, there were other contributing factors. Investor adoption of environmental, social & governance (ESG) principles and focus on the transition to cleaner energy accelerated during the fiscal year. Traditional energy companies are thought to be long-term losers to solar, wind, and other green technologies. The good news is the sector started to take these issues more seriously, with several companies publishing their first sustainability reports, highlighting areas where they already excel, and committing to specific operating practices that reduce emissions. Midstream energy scores particularly poorly on governance given the particulars of the MLP structure and a recent history of egregious outcomes for limited partner investors. A number of MLPs have converted to traditional C-corporations, where governance protections are greater, but several large midstream companies continue to back the MLP structure. Uncertainty around the U.S. presidential election was also a factor, as investors worried about an acceleration of the transition to cleaner sources of energy should the Democrats win control of the White House and Congress. To that end, Canadian midstream companies generally outperformed their U.S. counterparts in the fiscal year.
What factors affected the performance of the Fund during its fiscal year?
The Fund underperformed the Alerian MLP Index on both a net asset value (NAV) and market basis, falling 82.7% and 85.1%, respectively, for the fiscal year ended November 30, 2020, versus a decline of 24.5% for the Index. Given the Fund’s relatively high levels of leverage in the first half of the year, it is not surprising that the Fund underperformed in a down market. The impact was particularly acute during the fiscal year due to the unprecedented selling pressure experienced from mid-February through mid-March, when the Index declined 65% over just 20 trading days. This extreme selloff forced the Fund into heavy selling to pay down leverage. Left with a significantly smaller asset base and less leverage than when the selloff began, the Fund was unable to recover to the same degree as the Index when the sector’s partial rebound began. Likewise, the Fund’s Lipper peer group finished the 12 months down 49.7%. Noteworthy is that the peer group was generally managed with lower leverage before the big selloff, and some of the funds in the peer group also own utilities, which finished up for the fiscal year.
Given the low level of assets in the Fund at the end of March, the Board of Directors made the decision to suspend the dividend and call for a shareholder vote on liquidating the Fund. However, while the majority of shareholders who voted did approve the liquidation, since the vote didn’t reach the necessary required number of votes to pass in July, the Fund has continued to
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)
November 30, 2020
be managed under its original mandate. The dividend, however, has remained suspended, and is expected to do so until the Fund can maintain a sustainable level of net assets.
The five largest individual contributors to Fund performance on an absolute basis were Antero Midstream, Cheniere Energy, Oneok, Rattler Midstream, and Tallgrass Energy. Antero Midstream traded higher on the improvement in natural gas prices, along with significant progress by its parent, Antero Resources, in reducing near-term debt maturities and the market’s perception of elevated counterparty risk. Cheniere rose on the stable tolling fee structure and strong counterparties underpinning contracts at its liquefied natural gas (LNG) liquefaction terminals. Oneok and Rattler suffered significant declines during the fiscal year, but we made timely additions to the Fund’s positions based on attractive valuation and the return of production volumes that had been curtailed during the collapse in crude oil prices. Tallgrass was acquired early in the year by Blackstone at a meaningful premium.
The five largest individual detractors from Fund performance on an absolute basis were Energy Transfer, Enable Midstream, Plains All American Pipeline, Western Midstream, and DCP Midstream. All of these MLPs had elevated leverage and were heavily dependent on production from crude oil basins, where drilling activity fell to levels insufficient to offset natural declines on existing wells. Each was also compelled to reduce its distribution during the fiscal year to accelerate debt reduction.
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.
For information regarding the indexes and certain key investment terms, see Key Investment Terms starting on page 7.
5


DUFF & PHELPS SELECT MLP AND MIDSTREAM ENERGY FUND INC.
PORTFOLIO HOLDINGS SUMMARY WEIGHTINGS (Unaudited)
November 30, 2020
The following tables present the portfolio holdings within certain
sectors or countries as a percentage of total investments as of November 30, 2020.
Country Weightings
United States 92%
Canada 8
Total 100%
Sector Weightings
Traditional Midstream   85%
    
Downstream/Other   15%
Total   100%
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