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CBRE GLOBAL INVESTORS

CBRE Global Investors, combined with CBRE Clarion Securities and CBRE Caledon, is one of the world’s leading real asset investment managers providing real estate and infrastructure investment solutions to over 500 clients worldwide.

CBRE GROUP

CBRE Global Investors is the investment management division of CBRE Group, Inc. the world’s premier commercial real estate services and investment firm.  The company’s shares trade on the New York Stock Exchange under the symbol “CBRE.”

REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Clean Slate

Midstream traded up for a 4th straight week since bottoming on December 3rd.  MLPs are up 12.7% from the bottom and the AMNA isn’t far behind with a 10% gain.  Thursday night’s news of the airstrike on a major Iranian leader pushed oil prices higher Friday.  That news hurt the broad market, and midstream stocks were briefly negative around midday, before rallying into the close.

Midstream stocks have had a nice holiday break from fund outflows and tax loss selling that pressured stock prices in the second half last year.  That break has helped midstream bounce and open the year strong relative to the broad market (although its only been two days).

One area of concern was something people in my neighborhood enjoyed this holiday season: warm weather.  Natural gas and ethane prices are lower to start the year, at a time when natural gas heating demand is usually near its highest levels.  Higher oil prices this week don’t help, raising the potential for even more associated natural gas if oil development picks up.

Over the last 4 weeks, however, fundamental or regulatory headwinds haven’t mattered as much as the break from technical headwinds.  With the holidays over, the open question for midstream remains: will the fund outflows resume after the recent pause?

Clean Slate

In 1994, a film was released that starred a former Saturday Night Live castmember where retrograde amnesia was the central premise.  This was 10 years before “Fifty First Dates” and 6 years before “Memento”.  The film was “Clean Slate”, starring Dana Carvey as a detective who woke up every day with no memory.  I thought of this film randomly this week for a few reasons. 

First, in the business of stock picking, we get a clean slate every year and a fresh opportunity to put up returns.  Second, midstream management teams have an opportunity to take a fresh look at the way they’ve operated and make some changes to adapt to the new environment.  Potential generalist investors would prefer management teams wake up this year forgetting everything they know about how MLPs have operated, instead shifting to a more traditional business model.

Clean Slate had a wide release, but produced less than $10mm in box office revenue.  10 years later, “Fifty First Dates”, which starred Adam Sandler and Drew Barrymore and featured a similar premise, grossed $196mm in domestic box office.  “Memento”, the breakout second film from director Christopher Nolan in 2000, also featured amnesia in its central premise.   Memento was a huge success for an independent film, grossing nearly $40mm.

So, in the category of films focused on major characters with unique memory loss situations, Clean Slate was the least successful, by a wide margin.  In this way, MLPs are the Clean Slate of the dividend stock universe, dramatically underperforming utilities, infrastructure and REITs in recent years.

Dana Carvey was fantastically funny as a cast member on Saturday Night Live in the late 1980s and early 1990s, among the most talented cast members ever (playng tons of recurring characters like Church Lady, Hans & Franz, President Bush, Wayne’s World, Johnny Carson, etc.).

But despite multiple efforts (“Opportunity Knocks” in 1990, Clean Slate, “Master of Disguise” in 2002), Dana Carvey wasn’t able to translate that talent to box office success like other SNL alumni.  He was better as a supporting character, like in “Wayne’s World”, which earned $185mm in box office revenue in 1992. 

In this way, Dana Carvey’s career is similar to our view of midstream stocks and their usefulness in an institutional context.  We believe midstream stocks function better as a supporting part of a global infrastructure strategy, as opposed to a standalone active allocation.

2019 Year-End Performance Wrap Up

Before I get into this week’s winners and losers, I want to direct you to my statistical review of 2019, including numerous charts (like this one below) summarizing index performance over the last several months, quarters and years. 

In addition, the post includes the final leaderboards for individual MLP and midstream stock returns in 2019.  USAC was the winner for MLPs and took the overall crown as well, while OKE was the winner for U.S. midstream corporations.  Click here to read more.

Winners & Losers

MLPs

Very strong start for ET this year, up 5.8% in just two days, which puts it near the top of the week-over-week return list as well.  Northeast natural gas-focused gathering MLPs CNXM and EQM traded well this week, which was curious given ongoing natural gas price weakness.

The top of the leaderboard 2 days into the year includes three coal-related names that were in the bottom 5 last year (ARLP, CCR and NRP).

Midstream Corporations

ENLC led the midstream corporation group this week on no news.  On the downside, ALTM was down close to double digits and continues to trade with extreme volatility in the new year.

AM and ALTM went from top 5 last week to bottom 5 this week, while ETRN stayed in the top 5.  WMB repeated in the bottom 5 week over week.  On the YTD leaderboard two days into the year, ENLC and LNG are setting the pace so far.

Canadian Midstream

Slow start to the year for Canadian midstream after a universally positive 2019.  Pembina was the worst performer of this small group.

Pembina finds itself at the bottom of the leaderboard to start the year, while Keyera is the only one of the group to be up so far this year.

News of the (Midstream) World

Still pretty light on news this week, but SMLP was able to secure some financing, WMB disclosed details of the Transco rate case and ET got the PA permit bar lifted and added Rick Perry to its board.

Growth Projects / M&A 

  • Summit Midstream Partners (SMLP) announced financing solution of Double E Pipeline with private equity firm TPG (press release)
    • TPG will purchase up to $80mm of redeemable, preferred interests in a subsidiary of SMLP that indirectly owns SMLP’s 70% interest in Double E Pipeline
    • The preferred equity will pay 7% interest that can also be paid-in-kind during the construction period
  • Williams issued two press releases this week:
    • Announcement on Transco rate case settlement filing with details on financial impact for 2020 (which was already included in early December guidance announcement (press release)
    • Announcement of completion of Gateway Expansion Project, which was placed into service 11 months ahead of schedule (press release)
  • Pennsylvania Department of Environmental Protection (DEP) agreed to lift the permit bar against Energy Transfer (ET) that had been in place for more than a year and had prevented progress on the Mariner East 2 pipeline project (Fox43 News)
    • ET was also fined $30.6mm in civil penalties relating to 2018 Revolution Pipeline fire

Other

  • Former U.S. Energy Secretary Rick Perry joins board of Energy Transfer (ET) (filing)
  • Randa Duncan Williams continues to purchase units of EPD, including more than 225,000 this week (filing)