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CBRE GLOBAL INVESTORS

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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: Dakota Access Denied

Midstream struggled in an otherwise strong week for the market, hurt by a court decision that rocked the Bakken while not offering much confidence for any midstream company seeking to develop energy infrastructure going forward.  While the stock market grinded higher, led by growth stocks, utilities were flat and global listed infrastructure was negative, but both well outperformed midstream this week, this year and the last 5 years.

This week’s pipeline news has the potential to be historically significant.  A major pipeline development with commercial support was cancelled due to delays and costs, and another existing pipeline was ordered to be shut after being approved and placed into service several years ago.  This week’s news raises concern over the outlook for future pipeline development, especially in an election year.  The pendulum has swung far to one side, but it doesn’t feel like there’s much hope for it to swing back the other way.

Oil Nostalgia

Oil prices held $40/bbl and oil price’s change YTD and YOY are outperforming all midstream indexes.  Midstream has devolved into a levered play on oil prices, or at least that’s how the group has acted in recent times.

This week in July 2008 was the peak oil price of just over $145/bbl, its highest price ever.  Also, around this time in 2014, oil prices peaked around $107/bbl and by the end of July they dropped below $100/bbl and haven’t returned since. 

Some believe we get back to $100/bbl when under-investment lead supplies to run dry.  That feels far away given current reliance on global production limits to sustain just $40/bbl. But things can change quickly.

Early July is also around the time in 2007 when MLPs peaked well before the global financial crisis.  The July 2007 peak for MLPs was the tightest that the yield spread to the U.S. treasuries has ever been at only 42 basis points.  By comparison, today the spread is nearly 1200 basis points (AMZ’s nominal yield is 12.6%).

Since its most recent peak in June, the AMNA index has dropped 20.9% (AMZ has dropped 26.9%).  The bounce off the bottom and the accompanying FOMO (fear of missing out) has faded even as oil prices grinded back above $40/bbl and the S&P 500 continued its ascent. 

It is possible that the 100%+ bounce from the depth of despair in March was the post-COVID high point for 2020.  Stranger things have happened, but a 30% rally back to early June levels feels daunting from here.  

Such strength would require positive news big enough to attract generalist investors away from their ever-rising growth stocks in favor of the midstream sector and its spotty recent track record of sustaining outperformance.  The announcement of a stay of the DAPL shut down would be one clear positive, maybe big M&A could be another.  But this week’s big M&A did not do the trick.

 

Winners & Losers

MLPs

There were a few positive MLPs this week, mostly those either without traditional midstream assets (EVA and SUN) or smaller, more illiquid names like DKL, SRLP and CQP.  The bottom 5 included two MLPs directly impacted by a Bakken Pipeline (DAPL) shut down, including PSXP and ET.  CEQP, which doesn’t own a stake in the pipeline, was also down on the DAPL news given Bakken exposure.

EVA repeated in the top 5 and is the only positive MLP YTD.  CEQP repeated in the bottom 5 week over week.  YTD, DKL joined the top 5 and CEQP joined the bottom 5.  NBLX down 70% is the worst performing MLP this year.

Midstream Corporations

There was one positive U.S. midstream corporation this week, ETRN, which is a beneficiary of the canceled Atlantic Coast Pipeline and a positive Nationwide 12 permitting update.  OKE, like CEQP above, was hurt by the DAPL news, and dropped 17%.  Others with Bakken exposure, like TRGP and HESM, were also underperformers. 

Cheniere (LNG) continued its strong relative performance of late, same with AM, both repeating in the top 5 week-over-week.  On the YTD leaderboard, HESM dropped a few spots this week.  Of the top 5 performers in this group, 4 of them are primarily natural gas-focused, including WMB at the top.  OKE is back at the bottom of the group this week, replacing ENLC.  TRGP also dropped a spot, down 55%.

Canadian Midstream

Canada was less volatile and with less dispersion than the U.S. midstream stocks, as per usual.  Gibson was flat on the week, TRP outperformed the other larger names ENB and Pembina.

Pembina went from near the top last week to the bottom this week, continuing to trade with more volatility than in recent years.  On the YTD leaderboard, TRP remains in front, but Gibson’s strong relative performance this week pushed it past ENB into second place. 

News of the (Midstream) World

Capital Markets

  • None.

M&A / Growth Projects

  • Berkshire Hathaway announced acquisition of certain gas transmission and LNG assets of Dominion Energy (D) for $9.7bn (press release)
    • Size of the transaction and the nature of the buyer was positive for midstream investors contention of cheap valuations of midstream stocks with similar assets
    • However, reported EBITDA multiple of 10x was not a great data point given most midstream companies with similar, high quality gas pipeline assets are trading above that multiple today
    • D also reduced its dividend by 33%
  • NGL Energy (NGL) announced a new produced water transportation and disposal agreement with a major producer (press release)

Other

  • U.S. District court ordered the Dakota Access Pipeline (DAPL) to be shut down within 30-days and to remain shut down until completion of the Environmental Impact Statement (EIS) by U.S. Army Corp of Engineers (Reuters)
    • The DAPL pipeline is owned by several midstream companies, including operator Energy Transfer (ET), but also ENB, PSXP and MPLX
    • Reports later in the week indicated that ET was confident in its appeal chances and would be open for nominations from customers in August (Bloomberg)
  • Dominion Energy (D) and Duke Energy (DUK) announced the cancellation of the $8bn Atlantic Coast Pipeline (ACP) project, citing ongoing delays and escalating costs (press release)
  • The Supreme Court ruled to allow the Army Corp of Engineers to resume using the Nationwide 12 permit for the construction of new pipelines, excluding the Keystone XL Pipeline (E&E News)
    • This ruling is positive for ETRN’s Mountain Valley Pipeline and for other pipelines under development
  • Martin Midstream (MMLP) announced exchange offer for existing notes, solicitation of acceptances of a prepackaged plan (press release)