Week Thoughts: Aftermath

MLPs finished this short week down 0.9%, their first negative week since mid-August.  Broad stock market weakness dragged MLPs lower Tuesday (despite higher oil prices) and oil price weakness dragged MLPs down Friday.  Interest rates dropped another 11 basis points, and the U.S. dollar index (DXY) reached its lowest level since December 2014, helping oil hold the $45-50 range.

Midstream/MLP stocks felt rudderless this week and are likely to oscillate with “The Macro” until 3Q results.  Individual stock events can still lead to sharp moves in either direction for individual names like we saw with AM, HEP and DM this week.  But aside from those isolated cases, a sustained MLP rally likely hinges on commodity prices or a series of very exciting M&A announcements that are not offset by large equity issuances.

Poll Question: Picking Up the Pieces

Midstream valuations are compelling, nominal distribution yields are high. But investor confidence remains in a state of lingering disrepair in the aftermath of staggering value destruction over the last few years.

It’s not as simple as resetting the dividends lower, rebooting a yield plus growth story off a new base.  It will take time and consistent results.  Like how property destruction we’re seeing from the train of 100-year storms tormenting the Gulf of Mexico is not going to be repaired overnight.

In Wreck-It Ralph, one of the better kid movies of the last decade, there is a character named Fix-it Felix and a video game where Felix takes a magic hammer and fixes things Ralph wrecks.  In Texas, in Florida and in the midstream sector, there is no magic hammer.

MLPs can regain investor confidence by:

  • All of the above (60%)
  • Delivering solid results over several quarters (23%)
  • Allocating capital better (less value destructive capex, holding flat or shrinking unit count) (11%)
  • Showing more management accountability (including turnover for poor performance, maybe) (6%)

Total Voters: 193

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It hasn’t all been commodity prices and poor capital allocation, though.  Broad stock market and investing trends have probably been impacting MLPs as well.  Which one do you think had the biggest impact?

Which investment trend has had most impact on MLP Sector?

  • Rise of passive investing (40%)
  • Quantitative trading strategies (28%)
  • Decline of wirehouse/broker model (20%)
  • Blogs, crowd-sourced investment analysis, democratization of information (13%)

Total Voters: 133

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Winners & Losers

Evidence of how hungry the market is for positive catalysts: both DM and HEP spiked Friday when Alerian announced their inclusion in the AMZI that’s tracked by the biggest MLP ETF.  HESM continued recent momentum, making the top 5 for a second straight week.

On the downside, AM declined on the sale of units by its sponsor in a marketed offering.  MMLP was hurt by index exclusion from the Alerian rebalance.  USDP was the worst performer this week, apparently the result of a negative article on a popular crowdsourced finance website.

I’ve consolidated the YTD chart into the chart below to save space and make room for Canadian midstream corporation section.  On the YTD leaderboard, PAA escaped the bottom 5, replaced by USDP.

General Partners & Midstream Corporations

GPs and corps outperformed the MLP Index this week as a group.  Reports and presentations this week highlighted a general lack of disruption from Harvey may have helped OKE, SEMG and TRGP outperform.

Below is a new chart this week, which adds the YTD total return for this group.  Only four of this group are positive for the year so far, with EQGP by far the best overall performer.  Unlike the MLP group where there are many MLPs with 20%+ returns, none of the GP and corporation group has produced 20% returns.

Canadian Midstream

As discussed last week, Canada’s midstream sector is becoming increasingly relevant to the U.S. market.  It’s a concentrated group of companies, just 9 in my universe, but two of them are among the top 3-4 largest midstream operators in North America.  In USD terms, Canadian midstream outperformed MLPs and U.S. midstream corporations.  This group was helped this week and this year so far by a weaker U.S. Dollar.  There was no news flow to drive returns this week, and the range of returns was tight, but VSN/PPL and GEI repeated near the top of the group.

News of the (MLP) World

Light-ish news week, but we did get a few announcements.  AM broke the seal on the fall equity offering season with a secondary that did not inspire confidence for future secondary offerings.  MMP added to its growth backlog, expanding off its existing footprint.  Alerian removed another name from its flagship index, and still has not announced a change to its index methodology to address dwindling number of MLPs in the index and increasing concentration.

Capital Markets

  • Antero Midstream (AM) priced public offering of 10.0mm common units at $31.45/unit, raising $315mm in gross proceeds for selling unitholder Antero Resources Corp. (press release)
    • Overnight offering, priced at 6.4% discount to prior closing price, traded down 0.7% from pricing in the next session
    • Sponsor AR gets 100% of the proceeds, no new units created, just more float
    • AR will hold 53% of outstanding AM L.P. units following the offering

Growth Projects / M&A

  • Magellan Midstream (MMP) announced two new pipeline projects, including:
    • 60-mile oil pipeline in the Delaware Basin with 250,000 bpd of capacity originating in Wink, TX and feeding the Longhorn Pipeline in Crane, TX (press release)
      • Expected to be operational in 2019 and to cost $150mm
    • Joint venture with VLO to expand its refined products pipeline system by 135 miles to deliver refined products from East Houston to Hearne, TX (press release)
      • Will enable MMP to deliver more volumes to customers in Temple, Waco, Dallas and into the Mid-Continent
      • Including 1mm barrels of storage at various points on the system and connections into refineries, MMP plans to spend $375mm on its share of the project, which is set to be operational in mid-2019
  • Tellurian (TELL) acquired upstream assets in northern Louisiana for $85.1mm (press release)
    • Assets include approximately 9,200 net developed and undeveloped acres and 19 producing operated wells with net current production of approximately 4 MMcf/d of natural gas
  • Ferrellgas Partners (FGP) announced acquisition of Service Plus Propane for an undisclosed price (press release)
    • Service Plus Propane is an independent propane retailer based in South Hill, VA

Other

  • Alerian announced changes to MLP index series (press release)
    • Alerian MLP Index (AMZ): Martin Midstream Partners (MMLP) to be removed
      • AMZ down to just 40 members
    • Alerian MLP Infrastructure Index (AMZI):
      • Dominion Energy Midstream (DM) and Holly Energy (HEP) added
      • NGL Energy (NGL) removed
Category MLP Market Post