Midstream stocks, and MLPs in particular, held up ok this week, all things considered. This week saw a combination of negative macro forces converge to crush energy stocks more broadly. Oil & Gas E&P ETF XOP dropped 7.6% this week, inline with the drop in oil prices. The S&P 500 declined 1.2%, hurt by earnings misses that were sold hard from industrials like CSX and tech giants like NFLX. In the face of that carnage, midstream was down less than 2%.
Kinder Cliff Notes
In spite of energy stock angst (more on that below), midstream stocks appear to be on firmer footing at the moment, having inflected and then held onto gains this year. This earnings season will be critical to the continued differentiated performance from midstream stocks.
Kinder Morgan kicked off earnings season with an underwhelming report that didn’t offer any real surprises. In summary, KMI has a stable outlook and its earnings were not a red flag for the rest of the midstream sector’s pending 2Q results:
Midstream Cliff Notes
I wrote a summer review post this weekend that pulls together our house view on trending midstream topics and on questions I frequently hear from advisors taking a fresh look at MLPs and Midstream after a few years off.
Summer of Energy Discontent – To Sleep, To Dream…No More?
“Now is the winter of our discontent / Made glorious summer by this sun of York” are the opening words of Shakespeare’s Richard III. The lines basically mean the end, or “winter”, of the discontent. Summer in this case, represents the beginning of a new, better phase. In that context, if winter is the end of something, then summer would far away from the end.
If that’s the case, we may still be in the summer of discontent for energy stocks broadly. Even though its been 5 years since oil cracked, it doesn’t feel like the general mood towards fossil fuels or energy stocks is improving. It may be a while yet before our summer of discontent reaches the twilight or winter that would signal an end of energy under-performance is near.
It seemed like signs of discontent were everywhere this week:
But we’re interested in hearing your thoughts. Where do you think we are in this cycle, if it is a cycle?
What stage of energy discontent are we in?
Total Voters: 135
Winners & Losers
ET was notable among the best performing MLPs this week. It was the best performing of all midstream companies with more than $10bn in market capitalization this week, likely benefitting from a well-timed Bloomberg report/leak of a large potential asset sale likely at an attractive valuation. Outside of ET, other more defensive MLPs HEP and TCP made the top 5.
On the other side of the ledger, NRP was the worst in the group, hurt by low natural gas prices that impact relevance of coal as a substitute, but also low prices for other commodities, which impact the minerals businesses NRP has diversified into in recent years. 3 of the bottom 5 this week were gathering & processing MLPs.
NRP and TOO repeated in the bottom 5 this week. SMLP went from top 5 to bottom 5. On the YTD leaderboard, OMP joined the top 5 while the bottom 5 got uglier across the board.
Not a single midstream corporation was positive in the U.S. this week and the median was down 3.9%, far below any of the indexes. The least bad performer in the group was PAGP at -1.3% in a reversal from last week when PAGP underperformed. KMI’s earnings were not well-received (KMI -3.7% this week, inline with peers), but the stock wasn’t crushed like some of the other S&P 500 non-energy companies that announced this week, a sign that weaker results for midstream is potentially already baked in.
ETRN and AM, two sponsor-backed Northeast natural gas players, were hit the hardest hit this week. The market has taken a draconian view of the viability of any producer in the Northeast, and that negative sentiment is trickling down. Talk of yet another Permian gas pipeline from KMI probably didn’t help. The rest of the bottom 5 was as you would expect: more volatile and/or commodity-sensitive names like TRGP, ALTM and SEMG.
ETRN and AM repeated near the bottom of the group, while TGE was among the best performers again this week. On the YTD leaderboard, AM is flirting with negative YTD return. TGE climbed up a few spots on relative strength.
While KMI’s results weren’t received very well, Kinder Morgan Canada’s stock price reacted positively to commentary of potential share repurchases. KML was the outlier, but the rest of Canada held up well relative to midstream stocks in the U.S., and the group traded in a pretty tight bunch as usual.
Keyera remains atop the YTD leaderboard after overtaking TRP last week. ENB’s YTD return slipped back below 20%.
News of the (Midstream) World
Growth Projects / M&A