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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

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Week Thoughts: Buyers Strike, Market Shuts Down

It was a brutal week for stocks, and midstream stocks were trampled underfoot in the stampede for the exit.  Despite underperforming this week, midstream and MLPs (each down 10%) are beating the S&P 500 (-12.5%) for the month so far, which is of little comfort.

The market reacted aggressively to all non-positive news this week, including the FOMC rate increase + commentary, Trump cabinet upheaval, or a pending government shutdown.  Positive incremental news on the oil front was ignored, with U.S. inventory report providing only temporary relief and OPEC jawboning ahead of January cuts failed to elicit a positive response.

More relevant to midstream, Kayne Anderson’s distribution cut Monday wasn’t helpful for midstream sentiment.  Wednesday’s Bloomberg report of potential PE interest in TGE seemed to help sentiment briefly, before the market was crushed following the Fed announcement later that same day.

Speaking of Strikes…Festivus for the Rest of Us

Originally conceived by the father of a writer on Seinfeld and practiced in real life in the 1960/1970s, the made-up holiday of Festivus exploded into the public consciousness due to a single Seinfeld episode called “The Strike”, which aired in December 1997 in the final season of the show.  According to Wikipedia, Festivus is celebrated on December 23rd, and was created in response to the over-commercialization of Christmas.  Traditions in the TV version include an aluminum pole (as opposed to Christmas Tree), the Airing of Grievances and the Feats of Strength.

The phrase “Festivus for the rest of us” is a reference to those who are no longer living to celebrate. In a year when we’ve seen a slew of MLPs disappear and we’ve seen an exodus of investor funds, Festivus seems more appropriate to celebrate than Christmas this weekend, particularly among those still interested in midstream.

Airing of Grievances

In the Seinfeld episode, the elder Frank Constanza starts this portion of the event with the following statement: “I got a lotta problems with you people, and now you’re going to hear about it!” This part of the tradition consists of lashing out at others and the world about how they have been disappointments to you in the past year.

The airing of grievances in Midstream I’ve been doing here throughout the year.  I have been outspoken against issues that are obvious and easy to call out, but hard to fix, including: leverage, IDRs, high payout ratios, creeping capex, poor corporate governance, and slow simplification processes.  It would be easy to point fingers at BWP, DCP, TRGP, AMGP, EQM, ET, among many others who exemplify the above issues.  But, I won’t do that today.

Instead, my abbreviated Airing of Grievances will focus on negative superlatives achieved this week.

MLP Index superlatives achieved this week:

  • Worst week since February 2016 when MLPs bottomed
  • 10th worst week ever
  • Third worst week in a December ever (the other were in 2014 and 2015)
  • On pace for third worst quarter ever (17.8% as of now, slightly better than 3Q2015 and 4Q2008

Oil, XLE and equities superlatives achieved this week:

  • Oil down 11.4% for worst week since January 2016
  • Lowest oil price since July 2017, after cruising through $50/bbl on Tuesday
  • Oil prices down 40% since peaking in October
  • XLE closed at lowest point since February 2016, down 28% from peak
  • DJIA down 6.8% for worst week since October 2008
  • S&P 500 down 7.1% for worst week since August 2011

Feats of Strength

Traditionally, Festivus isn’t over until the head of the household gets pinned in a wrestling match.  We have very few feats of strength to report.  Midstream has beaten the S&P 500 this month, perhaps that qualifies as a minor feat of strength.

For a second feat of strength, I thought it would be fun to re-visit the concept of MLP Distribution Aristocrats, especially as we approach the final, final wave of distribution cuts for MLPs.  See my piece from December 2011 for more details on the concept (see original post here).

The idea was to identify and list the MLPs who had raised their distribution in each of the last 10 years.  In the post from 7 years ago, there were 11 MLPs on the list.  The chart below, in which I reflect numbers as of Tuesday (12/18/18), there are just 6 Distribution Aristocrats, and by the end of next quarter, there will be just 4 such MLPs (the shaded MLPs are being bought or merged).

MMP, EPD and HEP accomplished with substantially less flair and engineering than ET, without relying on IDRs or combining subsidiary MLPs in accretive self-deals along the way (RGP, SXL, ETP).

Festivus Miracles Await

With just 5 days left in the year, even a miracle is unlikely to put much of a dent in the pain of 2018.  Minor miracles to hope for are that oil prices and stocks stop falling so midstream can rally.  Perhaps the grievances of this week, this month, and this year can become the feats of strength in 2019.

Merry Christmas to my readers.  I may post a day or two later than normal next week to capture the final year end numbers as of next Monday.  Also, be on the lookout for a non-weekly post where we try some foresight for a change and offer some thoughts on the opportunities and challenges for Midstream in 2019.

Winners & Losers

MLPs were the worst performing group in midstream this week, and the three index rebalances over the last week didn’t seem to have much impact.  3 of the top 5 performing MLPs this week are zombie MLPs waiting on transactions to close (VLP, TLP, DM).  All of the bottom 5 were down more than 19% each, with 3 younger producer-sponsored gathering & processing MLPs included, with HCLP near the bottom for a third straight week.

Things were shaken up as we near the finish line of the year on the YTD leaderboard.  NRP and CQP are well ahead of the back now.  TLP joined the top 5 by holding flat while others fell by the wayside.  The bottom 5 is comprised solely of MLPs with returns worse than negative 45%.  Incredible.

Midstream Corporations & General Partners

Things weren’t quite as terrible in the Midstream corporation group, with median returns from this group finishing well ahead of the AMZ.  TGE had a great Wednesday that separated it from the pack on the upside.  Cheniere’s new commercial contract announcement helped support its price for most of the week.  PAGP also seems to have gained some traction relative to others lately.  AMGP was crushed all week and was far and away the weakest in the group, on what appears to be a massive overreaction to its sponsor’s hedge monetization and plans to spend within cash flow in 2019.  Others that underperformed were those with assets closer to the wellhead on the midstream spectrum.

PAGP, TGE and LNG repeated near the top of the group this week.  TRGP repeated near the bottom of the group.  On the YTD leaderboard, OKE’s once massive lead is down to 20 bps with just 5 trading days left in the year.  TGE joined the top 5, replacing TRGP.  The bottom 5 YTD returns shifted lower, but remained largely intact, outside of AMGP’s collapse.

Midstream Corporations

Enbridge traded relatively well again this week, perhaps helped by closing the buy-ins of its two MLP subsidiaries that combined to represent around 4% of the Alerian MLP Index.  Last week’s best performers Keyera and Pembina were at the bottom this week, each down double digits on no news.

Returns year-to-date are now universally negative for Canadian midstream.  TRP’s dropped below 20% negative returns, more than 500 basis points behind Enbridge in the annual battle among the largest midstream companies in Canada.

News of the (Midstream) Week

Capital Markets

  • EPD bought back $30.8mm worth of units at an average price of $24.92/unit under a 20-year old buyback program (filing)
    • This seemed like an opportunistic trade to clean up the old buyback program and to support the stock rather than part of a large buyback effort

Growth Projects / M&A

  • Two new LNG offtake agreements announced this week, both with existing LNG export facility owners
    • Cheniere (LNG) announced 20-year agreement with PETRONAS for 1.1 mtpa of LNG from Train 6 of Sabine Pass, indexed to Henry (press release)
    • Sempra Energy (SRE) announced 20-year agreement with Polish Oil & Gas for 2 mtpa of LNG from the Port Arthur facility, which remains at the development stage (press release)
  • Altus Midstream (ALTM) exercised option with Kinder Morgan (KMI) to acquire 15% equity interest in $1.75bn Gulf Coast Express Pipeline (GCX) project (press release)
    • KMI retains 35% of the project, and DCP and TRGP each hold a 25% stake in GCX
    • ALTM holds options to purchase equity ownership in 4 other pipeline projects: Salt Creek NGL Line (50%), Shin Oak NGL pipeline (33%), EPIC Crude (15%), Permian Highway (33%)
  • A consortium including Stonepeak Infrastructure and Brookfield Asset Management is reported to be interested in acquiring Tallgrass Energy (TGE) (Bloomberg)
    • Shares closed 13.7% higher on day of the report
    • Stonepeak has previously been involved in funding transactions to support individual assets, and into preferred equity, so this reporting could be referring to financing of TGE’s Seahorse project as opposed to a full takeout
  • Kinder Morgan (KMI) announced it will move forward with its Roanoke Expansion projects on the Plantation Pipe Line and Southeast Terminal after a successful open season (press release)
    • The Plantation Pipe, backed by a committed 20,000 bpd of volumes, will be a $49mm project
    • The Southeast Terminal, backed by a committed 10,000 bpd of volumes, will be a $9mm project
    • KMI also announced the acquisition of a 70.4% majority stake in Reinecke Partners for $20mm
  • TransCanada (TRP-CA) announced the sale of the Coolidge Generating Station to SWG Coolidge Holdings for $465mm (press release)
    • The 575 MW natural gas-fired power facility is located in Arizona and is underpinned by a long-term power purchase agreement
  • NGL Energy (NGL) announced sale of South Pecos Water Disposal assets to WaterBridge Resources, LLC for $238.8mm (press release)
  • Alliance Resource Partners (ARLP) announced the acquisition of the GP interests in AllDale Minerals and all of the LP interests in AllDale not currently owned by ARLP’s affiliate, Cavalier Minerals JV, for $176mm (press release)
    • ARLP will own 42,000 net royalty acres located in the Anadarko, Permian, Williston, and Appalachian basins after the acquisition closes
    • ARLP also announced it has begun development of the Excel Mine No. 5, an extension of its MC Mining operation in Kentucky
    • ARLP expects total capex of $45-50mm over the next 18-24 months
  • CrossAmerica (CAPL) announced the acquisition of 192 convenience and fuel retail stores from Alimentation Couche-Tard (ATD-CA) with an aggregate value of $184.5mm in exchange for CAPL assets of equal value (press release)
    • CAPL assets include 56 convenience stores that are currently leased and operated by Couche-Tard and 17 stores owned by CAPL

Other

  • Kayne Anderson MLP/Midstream Investment Co. (KYN) reduced its monthly distribution 20% to $0.12/share from $0.15/share (press release)
    • The third distribution cut for KYN since 2015, for a total reduction of 45%, a bit worse than the market cap weighted average of the sector overall since 2015, due to leverage