Midstream stocks had an all-time great week of stock performance, with double-digit returns across all three indexes, driven by a double-digit gain in oil prices and another surge in the broad stock market. MLPs were up each of the last 4 days of the week, with the biggest move on Friday after the surprisingly positive May jobs report.
All of this stock market positivity was in the face of civil unrest on a scale not seen in decades in the United States. Unlike events in past decades, images and video of peaceful and not so peaceful interactions in the streets of the country were dispersed globally in real time.
The chasm between Main Street and Wall Street has never felt wider. But as the jobs report showed and as the restarting of activities across the country show, economic activity is improving, so maybe the chasm isn’t as big as it feels (my feelings on the subject are still being influenced by me not being able to get a haircut).
Momentum Building from New Investors
The very strong bounce off the bottom has improved the year to date return for the sector to a much more palatable negative ~20% area, although midstream is still well off the pace of Listed Infrastructure, the S&P 500 and utilities. Oil prices approaching $40/bbl appear to be giving incremental investors confidence in the high nominal yields afforded by MLPs.
Existing long-time investors I speak with and closer followers of the sector in the sell-side analyst community are more skeptical of the outlook given elevated leverage across the group and limited opportunities to grow EBITDA over time to reduce leverage, especially if the election changes the outlook for development of hydrocarbons and pipelines. Less scrupulous buyers don’t appear to care about any of that.
Recent momentum has been stronger than I can remember, and it has sustained after the initial bounce in April. There has already been some shifting in sentiment from skeptical midstream investors forced to chase the strong uptrend for midstream as FOMO (fear of missing out), building on that momentum. This week it felt like midstream stocks were almost unstoppable, especially Wednesday when the market was negative and oil prices were flat, but midstream was still green.
In 2010, a film was released about a runaway train called Unstoppable, loosely based on an actual runaway CSX Corp. train incident in 2001. The film starred Denzel Washington and Chris Pine. Tony Scott (Top Gun, Last Boy Scout, Beverly Hills Cop II, True Romance) directed it, and it was his last film before his death in 2012. The film grossed $168mm at the box office.
To stop the train in the film, the main characters initially climb onto the train and attempt to manually engage the brakes on each car, but they run into trouble and the train actually accelerates. Eventually, Chris Pine’s character rides in a truck to the engine, jumps on and manually engages the brakes and stops the train.
Midstream’s move higher won’t be stopped by more fundamental issues of leverage, competition, growth challenges, counterparty risk, or regulatory uncertainty at this point. It feels like the one thing that can stop the gain train is a stalled engine, which in this analogy is oil prices.
Two big acronyms seem to be the biggest areas of risk for oil prices: OPEC and COVID-19. Both seem to be dormant at the moment, but as we’ve seen in the past with this sector, risk happens fast.
Another One for the Books
I’ve updated the top 10 best weeks of all-time chart with this week’s new entries. This week was the best for MLPs in nearly 5 years and second best in more than a decade. It was also the 3rd 2020 week to make the top 10 list, so far…
For the broader midstream index (AMNA), this week was the 3rd best since 2014 when data for the index begins and the second-best week this year.
