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REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Another Lost Week, Year for Midstream

The short final week of the year was good for most stocks, but Midstream stocks were left out again.  The S&P 500, utilities and infrastructure stocks traded up, along with oil and natural gas prices.  Midstream stocks underperformed the broad market for a 4th straight week.  Midstream’s bounce off the bottom early in the quarter appears to have left positioning largely settled into year-end.

The last month or so has been quiet in midstream-related news.  Expect some company news in the coming weeks, potentially M&A or at least some capital markets activity.  Also, the first week of 2021 offers potential macro news that could drive volatility in midstream.  First, there is an OPEC meeting Monday, which always carries some risk.  Then, the Georgia runoff elections are Tuesday, which could have regulatory or tax implications for midstream stocks.

After yet another year of underperformance, it does feel that midstream is due for a bounce back in stock performance.  Some would argue that 2021 is finally the year that high free cash flow yields will be realized and stocks will attract investor attention.  But elevated financial leverage, weak corporate governance, excess capacity across most basins, and continued fund flow moves away from energy stocks remain headwinds to performance. 

High quality, demand-pull pipeline and export infrastructure should outperform upstream-oriented names in a sector where money flows into midstream sector funds is challenged, but generalists might find value and opportunity among a few of the higher quality, scale midstream players.  That should lead to further sector rationalization, potentially some consolidation, such that there are fewer midstream tickers this time next year.

Being happy to see 2020 end is beyond a trope at this point.  Netflix even made a Mockumentary about it that hit on all the obvious jokes about what a brutal and bizarre year 2020 has been (I would not recommend watching it, it’s neither funny nor interesting).  For midstream investors, anticipating with glee the end of a bad year has become an annual tradition.  Again, we look forward to the clean slate that the arbitrary end of the year date offers.

 

Status Update: MLP Index

It is very rare, but extremely convenient, that the end of the month, quarter and year all fall on the end of the week.  We’ll discuss each time period in turn. 

  • AMZ finished December positive, a third consecutive positive month, but the index faded after a strong start to the month and underperformed the stock market in each of the final four weeks of the year.
  • AMZ finished with a 32% return in 4Q, its second-best quarter ever.
    • Only 2Q of this year was better. But the two best quarters don’t come close to making up for the worst and 6th worst quarters ever.   
  • AMZ finished 2020 with -28.7% total return, its 3rd worst year ever (after 2015 and 2008)
    • It was the 4th negative year out of the last 6
    • AMZ underperformed broader midstream indexes again in 2020

But hope is just around the corner.  Even though January of 2020 was -5.6%, January is typically a strong month for MLPs, with average return of almost 4% over 25 years. Also of note, In each of the two worse annual return years, AMZ had strong positive returns the following year.

Status Update: Alerian Midstream Index (AMNA)

The AMNA did not keep pace with the strong 4Q rally in MLPs, but as has been the case in 6 of the last 7 years, AMNA outperformed AMZ.  That reflects a disparity in asset quality, governance structure and fund flows away from MLPs. 

  • AMNA held onto a positive return for December, fading like AMZ but without the strength from the start.
  • AMNA posted its 3rd best quarter in its brief history, only after 2Q 2020 and 1Q 2019.
  • AMNA finished 2020 with -23.4% total return, more than 500 bps better than AMZ.
    • 4th negative year in the last 6.

Winners & Losers

MLPs

Despite negative returns for MLPs overall again this week, there were several small MLPs that traded up, led by WLKP.  Trends all year continued, with liquids midstream names like NGL, PAA and GEL among the biggest losers and small cap downstream-oriented MLPs like SRLP and DKL among the winners.

WLKP and USAC repeated in the top 5 week-over-week.  ET repeated in the bottom 5, struggling to find support in the final weeks of the year.  SRLP came from behind to take the top performance spot for 2020 from EVA, which had been well ahead for a few months.  The bottom 5 is comprised totally of MLPs with negative 50%+ returns.  NGL’s big drop this week solidified its spot at the bottom of the MLP group with a negative 75% return in 2020.  Staggering numbers that will reset next week.

Midstream Corporations

Natural gas prices were volatile this week, but global LNG prices spiking recently has helped Cheniere attract some attention and fund flows in recent weeks.  Cheniere was the only positive U.S. midstream corporation this week. 

AM sold off on the week but finished the year as the only midstream corporation with a positive return.  Cheniere’s big week helped it climb a few spots to finish 2020 in second place overall.  No other changes among the order of the final leaderboard.

Canadian Midstream

Mixed results in Canada this week, but overall the group outperformed U.S. midstream and MLPs, a familiar story. 

TRP bounced back a bit this week, while PPL and IPL were again at the bottom of the group.  With the leaderboard finalized, ENB finished in the top spot after a strong second half of 2020 with regulatory momentum on Line 3.

News of the (Midstream) World

No material news in midstream this week.

Capital Markets

  • None.

Growth Projects / M&A

  • Private midstream company Howard Energy Partners announced acquisition of Javelina processing facility from MPLX for an undisclosed amount (press release)