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REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Asymptomatic as Oil Declines

The stock market broke its losing streak, and MLPs and U.S. midstream came along for the ride this week, bouncing slightly after a rough week, month, quarter and year.  Weakness in Canadian midstream dragged down the AMNA Index.  Utilities were the good kind of high beta this week, and the Infrastructure Index kept pace with the S&P 500. 

Oil dropped back below $40/bbl, natural gas futures rolled to the next month and sit above $2.50/mmbtu as the weather turns chillier.  Oil markets seem to have reacted to concerns of a slower return of economic activity and demand in the coming months as case counts tick higher, including the biggest case so far that hit on Friday when President Trump tested positive.  The stock market largely shrugged off that news, focusing instead on progress towards another stimulus package.  So much happened, the debate Tuesday is thankfully a distant memory

Within midstream, it was an up and down week, with end of month selling giving way to some intra-sector rotation into higher risk midstream stocks later in the week, as you’ll see in the charts below.  Positioning into the final quarter of the worst YTD ever for midstream feels less important than identifying the inflection point when sentiment for energy goes from extremely negative to more neutral to positive.

That inflection could be big M&A, which continued this week in upstream and was rumored in utility land between NEE and DUK.  But consolidation continues to be unlikely in midstream, with management teams unwilling to risk a huge negative market reaction by taking on troubled balance sheets or assets.

Status Update: September of Embers

The -13.6% return in September was the 3rd worst September in history, after 2008 and 2015.  It was just the 3rd worst month of 2020 for MLPs, after February and March.  The quarter finished down 16.3%, inclusive of distributions, a big step back from the 48% bounce in 2Q.  The spread between MLPs and midstream (AMNA) blew out in 3Q, with the bounce sustaining more for midstream than MLPs, which is typical of bounces in the last 5 years.

Looking ahead, October has been at least 4% negative each of the last 4 years, which is downright spooky.

AMNA Status: Also Not Good

The broader midstream index dropped double digits as well in September, bad enough to be the second worst September on record (6 years of data) after 2015’s -15.3%.  3Q finished down 9.4% after a bounce in 2Q.  That puts YTD through September at -36.2%, the worst ever return through 9 months of the year.

Looking ahead at expectations for the 4th quarter, the AMNA’s best 4Q in the last 6 years was +2.2% in 2019.  The worst was 2018 at -15.0%, with average 4Q return since 2014 of -5.1%. 

Looking a bit further into the past, the MLP Index (AMZ) had three straight years (2009-2011) when 4Q returns averaged 14% in the sustained bounce off the 2009 low.  Such a sustained rebound feels a long way off, but it did happen once upon a time.

More Historical Context

See below for an updated chart of the worst months ever.  MLPs have historically bounced back pretty well in the subsequent year after a big downdraft.  It has been 7 months since things came of the rails for MLPs in 2020.  Since February MLPs are -33% through 9/30, but MLPs are +26% since March.  Timing the big swings has been everything in this sector since 2014.

Below is the breakdown of worst months in the last 6 years for the broader and less volatile AMNA index.  Average returns the twelve months after downdrafts are higher for AMNA than MLPs, which makes sense.

Winners & Losers

MLPs

SPH was again near the top of the MLP heap this week.  Joining them were many beaten down names with ties to Colorado production, including NGL, NBLX and WES.  ENBL also caught a bid.  On the downside, OMP was the worst performer, with wild swings in price early in the week on the bankruptcy filing by its parent company.  Refinery-backed small cap names HEP and PBFX continue to struggle in the uncertain environment for refineries.  ET and MPLX were also weaker, dragging down the MLP Index, likely on continued down grossing of MLP exposure broadly.

NBLX went from bottom 5 to top 5 week over week amid ongoing volatility.  OMP went from top 5 to bottom 5.  SPH in the top 5 for a third straight week.  On the YTD leaderboard, EVA gained on the group, CQP returned to the top 5.  NGL escaped the bottom 5, replaced by PSXP.

Midstream Corporations

Big divergence among midstream corporations this week, with some oversold names catching a bid and some rotation from some higher quality names.  Higher beta, upstream-oriented names (PAGP, RTLR, OKE, TRGP, ENLC) were sharply positive despite oil prices being sharply negative.  Recent stronger performers LNG and WMB were laggards.

Week over week, PAGP, OKE, RTLR and ENLC went from bottom of the group to the top this week in this ongoing period of extreme movements.  On the YTD leaderboard, WMB retains its lead on the group and LNG lost some ground.  OKE and RTLR climbed up a few spots ahead of TRGP, but all four of the worst performers remain down more than 60%, including dividends.

Canadian Midstream

It was a week of rotation in midstream, out of the most stable names across the space, including the two monster Canadian midstream names: TRP and ENB.  Stocks rotated into appeared to be in the U.S., so beyond Keyera there were no positive names in the space.

ENB and TRP went from best to worst week over week.  GEI was worst last week and didn’t get much of a bounce this week.  That GEI money is maybe shifting over to names with more octane like Keyera.  On the YTD leaderboard, TRP fell back into second place and Pembina dropped behind Keyera into 5th place.

News of the (Midstream) World

A few M&A deals and an agreement signed north of the border this week.  NGL was busy with press releases in the USA.  Also, MLP sponsors MPC and OAS had some sobering announcements. Not likely to see big midstream M&A, but upstream mergers and rationalization continue.

Capital Markets

  • DCP Midstream (DCP) filed form S-3 to register $750mm worth of new common units (filing)

M&A / Growth Projects

  • Inter Pipeline (IPL-CA) announced an agreement to exchange its interests in Empress II and V straddle plants for the Milk River pipeline system and $35mm in cash from Plains All American (PAA) (press release)
    • A second consecutive week of strategic announcements by Inter Pipeline has helped it garner some attention from the market, and is maybe an indication that management is finally behaving with more urgency around the balance sheet challenges
    • Milk River pipeline is expected to generate $25mm in EBITDA annually
  • TC Energy (TRP-CA) signed historic Memorandum of Understanding (MOU) for Natural Law Energy (NLE) to pursue an equity interest in the Keystone XL Project and other potential related midstream power projects (press release)
  • NGL Energy (NGL) announced commissioning of Poker Lake Express pipeline (press release)
  • NGL Energy (NGL) announced new agreement for produced water transportation and disposal in the Delaware Basin (press release)
  • Tidewater Midstream and Infrastructure (TWM-CA) and partner TransAlta Corp (TA-CA) announced agreement to sell Pioneer Pipeline to ATCO Gas and Pipelines for $255mm (press release)
    • The sale was accompanied by a new agreement between TransAlta and NGTL for new and existing transportation service

Other

  • Oasis Petroleum (OAS), the sponsor of Oasis Midstream (OMP), filed for bankruptcy protection under CH 11 (press release)
    • Subsidiary MLP Oasis Midstream (OMP) was not included in the filing and there are no cross-default provisions that would impact OMP
    • No impact to day-to-day operations of OMP
  • Marathon Petroleum (MPC) announced layoffs of more than 2,000 employees (press release)
  • Naturgy re-negotiated an LNG contract, not one with Cheniere or any other U.S. LNG exporter (Argus)