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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Breaks Out with No Brakes

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.

Winners & Losers

MLPs

ENBL rallied more than 50% on no news other than the steady rise in oil prices that raises the outlook for development of acreage around its assets in Oklahoma and the Bakken.  NGL was second after reporting results and announcing a term loan.  Others in the top 5 have been among the better performers off the bottom, and that momentum continued this week.  On the downside, SRLP’s sponsor pulled its offer for the outstanding shares, which took some air out of the shares.  Other generally defensive stocks were among the underperformers.  HEP had some potentially negative disclosure around the Cheyenne refinery.

DCP repeated week over week in the top 5, PBFX went from bottom 5 to top 5 week over week.  On the YTD leaderboard, CQP went from 5th best to the overall lead and a positive YTD return!  DKL vaulted into second place from outside the top 5 as well.  GLP joined the bottom 5, replacing ENBL.

Midstream Corporations

Volatile stocks dependent on upstream development activity dominated the top 5 of the 1099-issuing group of U.S. midstream stocks this week, led by ENLC.   LNG rallied 14% and was among the worst performers in this wild week.  Defensive midstream players like HESM, WMB and KMI were largely ignored this week in favor of higher beta stocks.

AM and OKE repeated near the top of the group, while LNG repeated among the laggards.  On the YTD leaderboard, WMB retook the top spot in the sector and AM climbed a few spots into third place.  TRGP is now the worst performer in this group with returns of -41%, followed closely by ENLC and OKE.

Canadian Midstream

In Canada, higher beta stocks elevated this week.  Biggest YTD loser Inter Pipeline led the group with a 17% gain.  Pembina was another bright spot with a big gain.  ENB’s latest Line 3 schedule update helped it land in the bottom spot for the week. 

IPL repeated near the top of the group week over week, while Pembina went from last place to near the top.  YTD, TRP remains the best overall performer, but the range of returns has tightened considerably after recent gains from the biggest losers.

News of the (Midstream) World

 

Capital Markets

  • NGL Energy (NGL) announced $250mm term loan facility with Apollo to refinance its acquisition bridge facility (press release)
    • Term is 3 years, callable at par after 2 years and carries an interest rate of LIBOR plus 8.00%

M&A / Growth Projects

  • Blackstone Minerals (BSM) announced asset sales of properties in the Permian Basin totaling $155mm (press release)
    • These sales exceed management’s asset sales goals and will reduce debt to below $200mm
    • BSM’s board of directors will evaluate increasing distribution after the transactions close in July
  • Sprague Resources (SRLP) announced withdrawal of proposal to acquire all of its outstanding common units (press release)
    • The proposal was announced on March 27th and was made for $13/unit
    • SRLP’s units trade above $14/unit today
  • Enbridge (ENB) announced Minnesota Pollution Control Agency intends to conduct a contested case hearing for Line 3 Replacement project, which delays the permitting process by at least another 3 months (press release)
    • ENB expects the majority of remaining $1.5bn of capital on the project to be spent in 2021
  • Holly Energy (HEP) disclosed sponsor’s intention to convert Cheyenne, Wyoming refinery into a renewable diesel production and permanently cease petroleum refining there (filing)
    • HEP assets at that location under review, including tankage, truck loading rack and certain crude oil receiving assets
    • Material impairment charge is possible

Other

  • Crestwood Equity (CEQP) released its second annual sustainability report, advancing its ESG and Sustainability Strategy (press release)
  • Sunoco (SUN) announced that its CFO Thomas Miller will retire, effective 9/1/2020 (filing)