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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

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Week Thoughts: 2018 Books Close off Lows

Monday to Monday, the AMNA was up 5.3% and recouped some losses for the month and save the sector from finishing with the worst quarter on record.  Midstream traded well, but underperformed strength in the S&P 500 (+6.6% since Christmas) and oil prices (+7.8%).  Below is a summary of midstream over the last 5 years.  Oil prices finished the year 24% lower, blowing it after calls for $100 oil over the summer.

Killing Time With Rocky

This New Year’s Eve was spent with the family, and all three kids made the commitment to stay up until midnight, which at least one of them has never done.  We tried to think of a fun family movie to watch while waiting for the New Year that would have some tie in to celebrating the new year to kill time until midnight.  Similarly, in Midstream we’ve been killing time waiting for transactions to close, re-balances to happen, and for the New Year.

We couldn’t think of any New Year’s Eve movies, and then it was decided we’d watch Rocky because it would be fun to watch now that we’ve lived in greater Philadelphia for 5 years and can to recognize the streets Rocky jogs through.  In the very first Rocky, the big fight vs. Creed took place on January 1st, 1976.  So, I guess Rocky I is a New Year’s movie (and Rocky IV is a Christmas Movie, like Die Hard).

In re-watching those Rocky films, there is clearly a formula, and the training montage became a bigger part of the formula with each film.  Also, Rocky often has to re-invent his boxing style during training (to get more rhythm, to get quicker feet, whatever), then when the fight starts, he bails on strategy almost immediately and ends up trading blows instead.

Similarly, Midstream is attempting to re-invent itself with self-funding, higher coverage financial strategies, and even the word “midstream”.  But many midstream operators remain far off from lofty goals self-funding targets, with leverage and capital spending being the main sticking points.  The market appears to believe midstream companies will revert to their spendthrift, levered-up ways when given a chance.

While we catalog the carnage of 2018 in detail below, we are on to 2019… we enter the new year with a clean slate, lowered expectations and a smaller universe of companies.  The bear case won out for oil prices, energy stocks and midstream in 2018.   That bear case is reflected in midstream stock prices.  Odds appear long for midstream to regain its past glory, but maybe this is the year the sector re-acquires the “eye of the tiger”, like the Italian Stallion does in Rocky III.

Status Update: December, Quarter and Year Not Great

The MLP Index finished the year with 4 straight negative months, capped by the worst December in the sector’s history.  But as bad as it was, it wasn’t even the worst month of the year (February was -9.7%), which shows what a terrible year it was.  The MLP Index finished with back-to-back losing years for the first time since 1998/1999.  It was also the third worst quarter in MLP Index history, behind 3Q 2015 and 4Q 2008.

The broader midstream sector held up slightly better than MLPs in 4Q (as measured by the AMNA index below), helped by better performance in Canada late in the year.  2018 was the third worst year on record for midstream and MLPs, behind 2008 and 2015.

Winners & Losers

There were some sharp moves this week in both directions.  TCP was up 17.8% and SUN was up 12.7% on the last 4 days of the year on no news, while AMID dropped 30% on the final day of the year to lock up the worst performance of the year.

Below is the final leaderboard for 2018.  AMID locked up the bottom spot with its performance this week.  On the upside, NRP finished up 55.6% for the year, far and away the best return.  CQP finished up 30% for second place, and no other MLPs were up more than 20%.  It was a rough day all around.

General Partners and Midstream Corporations

Only 3 midstream corporations finished positive in 2018.  Cheniere Energy finished with the top return in the midstream corporation group in 2018, just under 10%.  OKE held the lead for almost the whole year, before giving it up at the end.  TGE had quite a comeback in the final days of the year, rallying 18% in 8 days to finish 3rd overall in 2018, helped by the Bloomberg story a few weeks back.

Median total return in 2018 for this group was -20%, far worse than both the AMZ and AMNA indexes.  SEMG ended the year at the bottom of the group, down 50%.  Common themes among the winners this year include visible, credible third-party growth stemming from competitive advantages (Cheniere in LNG exports, OKE in Bakken natural gas and NGL value chains).

Canadian Midstream

ENB traded up 6% on the final week of the year and finished the year well ahead of rival mega-cap TRP, but still down 16% for the year.  The chart below shows the final leaderboard for Canadian midstream, with only one positive stock in the group and 3 down m ore than 20%.  Gibson Energy won the group and fellow small-cap Keyera was worst.

News of the (Midstream) World

Not much news the last few weeks, but the Mariner East 2 news was welcome this week and seemed to help sentiment the last few days.

Capital Markets

  • None

Growth Projects / M&A

  • Energy Transfer (ET) announced Mariner East 2 Pipeline is in-service (press release)
  • GasLog (GLOG) announced two long-term charters with Cheniere Energy (LNG) and places newbuilding orders at Samsung Heavy Industries (press release)

Other

  • Tom Long, Energy Transfer (ET) CFO, purchased $295,000 of ET stock (Form 4)
  • American Midstream (AMID) disclosed because of high leverage and liquidity issues, AMID will not pay a distribution in 4Q (filing)