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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Midstream Week Thoughts: Extreme Retracement

It was a big week for midstream again, this time better than the broad equity market, which was also up again.  MLPs had their 8th best week ever, slightly better than last week’s 9.6% gain.  Most of the rally came Friday when AMZ rallied 7%, which may have been helped by TGE owners re-balancing or rotating into other MLPs after the acquisition closed.  The broader midstream index (AMNA) was more in-line with the S&P 500, dragged down by a few large corporations that underperformed.

Oil futures front month flips to June this week as the May contract expires Monday.  June closed the week trading around $25/bbl, several dollars above the May contract shown above.  With storage filling and demand still dormant, expect pressure on the new front month in the coming weeks.  Expect more shut-in announcements from producers, expect government mandated curtailments to remain topical but inert.

Update on the Bounce

This week was a third straight week of more than 7.5% gains for AMZ, its best 3 week stretch ever.  Midstream stocks have bounced hard off their absolute lowest points.  Off the bottom, AMNA and AMZ are both up 50%.  The AMZ would need to fall 37% from here to retest lows.  Quite a bit of damage has already been done, but it does feel like the lows for 2020 may be in.  That’s not to say volatility is over, but another 35%+ drop from here seems unlikely. 

Even with that bounce, the MLP Index remains 20% away from its 50-day moving average, and 80% away from its 200-day moving average.

Earnings Season Incoming

Earnings season kicks off this week with Kinder Morgan (KMI) reporting Wednesday.  We have more uncertainty about the forward outlook than normal, and 1Q results are not likely to change that. 

Even without the prospect for visibility, it feels like there is potential for midstream to react positively to earnings.  Data coming in weekly has been very bad.  Results for 1Q and 2Q will be bad.  After the swift and massive re-rate across the group in March and the modest recovery to date, results that would have been terrible for stocks a month ago may not be considered as bad as feared today.  Such is the power of lowered expectations.  

Winners & Losers

MLPs

EQM led all MLPs with a 34% gain this week on no company-specific news.  PAA was close behind.  Every one of the top 5 this week are larger MLPs with substantial trading liquidity, perhaps benefiting from rotation from owners of TGE after that transaction closed.  Names already well-owned like EPD and ET did not appear to benefit from that rotation.  CEQP maintained its distribution, which was very well-received Friday.

The worst performing MLPs included smaller names, mostly outside the mainstream MLP indexes, worst of all was BSM, down 20%. 

NGL repeated in the top 5 this week.  EQM went from bottom 5 last week to top 5 this week.  On the YTD leaderboard, EVA remains on top, with no changes in the order of the top 5.  NGL climbed out of the bottom 5, replaced by DKL this week.  NBLX is now the only MLP we track down more than 80% YTD.

Midstream Corporations

AM maintained its dividend this week, which helped it rally 40% to lead the corporation group this week.  Two MLP trackers (ETRN, PAGP) and two up-C partnerships (HESM, TGE round out the top 5).  TGE rallied back up to its agreed upon take-out price, closing the massive merger arb spread that blew out in March as the deal closed this week. 

TRGP was an outlier on the downside this week, especially for a risk-on week with plenty of other gathering & processing names rallying hard.  On the other hand, it was up 36% last week.  KMI was also negative ahead of its 1Q results next week.

On the YTD leaderboard, TGE is far and away the best performing midstream company in the universe, because the cash takeout by Blackstone was honored.  That was a rocky deal, but in the end, investors got a sweetener and a place to hide out the last few months.  PAGP climbed out of the bottom 5, replaced by OKE.

Canadian Midstream

Canadian midstream underperformed this week, especially TRP, which had a setback on the Keystone XL pipeline construction process.  Gibson and Keyera far outpaced the group.  Gibson is seeing interest in this strong environment for storage assets. 

KEY repeated near the top of the group this week, but it remains near the bottom of the YTD leaderboard.  TRP was at the bottom this week, but YTD it is still at the top of this group and second best performing midstream stock in the universe (after TGE).

News of the (Midstream) World

Light news week in terms of transactions.  The big news that moved stocks was reiteration of dividends (CEQP, AM) and transactions (TGE) previously announced. 

Capital Markets

  • None.

Growth Projects / M&A

  • TC Energy (TRP-CA) and the Keystone XL Pipeline face fresh setback after FID just 2 weeks ago (Bloomberg)
    • Montana judge cancelled the water permit issued by the Army Corp of Engineers, deciding it failed to consider adequately the impact of the project on endangered species
    • There are other pending lawsuits where opponents are seeking construction halts at the border crossing

Other

  • Alerian announced special rebalance to remove TGE from the AMNA, AMUS, AMZ indexes (press release)
    • TGE had already been removed from the AMZI, tracked by the large MLP ETF AMLP
    • The re-balancing wasn’t as impactful as it otherwise would be if TGE were still in AMZI, but the transaction closing likely supported the rally late in the week in other MLPs as managers rotated into new names
  • DCP Midstream (DCP) announced fresh cost reductions, plans to lay off 15% of work force (press release)

Distributions

  • There were some big moves after distributions announcements this week, in both directions, with MLPs yield 30%+ (USAC, CEQP, AM) reacting positively to distributions being maintained while distribution reductions were met with selling.
    • CorEnergy Infrastructure Trust (CORR), a vehicle marketed to MLP investors, reduced its distribution by 93% (doesn’t seem like there will be midstream REITs anytime soon, despite some talk of it late last year)
    • WES and NS have not yet announced distributions and remain somewhat uncertain