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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Falling Tension, Rising Tide Lifts Midstream

MLPs extended their winning streak to 5 weeks, but MLPs and midstream stocks were weaker towards the end of the week as oil prices and energy stock prices sank lower.  Natural gas and NGL prices were up on the week but remain at low absolute levels.  Capital markets came out of hibernation with more than $12bn of debt capital markets activity, a $1.6bn preferred issuance and KMI’s $764mm (net of tax) exit from Pembina shares. 

Broad equities rallied through escalation and de-escalation (for now) with Iran, generally glossing over the tragic.  Positive stock movements in the broader equity market was supportive of midstream stocks even in the face of falling oil prices.

Earlier this week, I posted a note on infrastructure that you can check out here.  Putting that piece together used up my creativity for the week, so I’ll sign off here.  Have a great week.

Winners & Losers

MLPs

MPLX led MLPs this week, and despite having substantial processing assets, was perhaps the beneficiary of rotation away from some of the more volatile upstream-oriented MLPs that traded down this week.  The rest of the top 5 was dominated by other liquids-focused MLPs NS, HEP and SHLX.

CAPL repeated in the bottom 5.  EVA and EQM went from top 5 to bottom 5.  On the YTD leaderboard, ET and NRP fell out of the top 5, replaced by SHLX and HEP.  Coal names remain the biggest winners so far, despite warm weather and generally low natural gas prices.

Midstream Corporations

Beyond new addition to the midstream corporation group HESM, which performed best, this week’s winners included downstream natural gas-focused names Cheniere and KMI.  Most of last year’s big losers AM, ENLC, and ETRN (not ALTM this week) resumed their declines, not a great signal.

Cheniere has started 2020 strong, after trailing many of its corporate peers last year, and sits near the top of the YTD leaderboard.  ENLC’s big swoon this week took it from second place last week to dead last.

One quick note for this week: I moved HESM to the midstream corporation group, because of its change to corporation for tax purposes.  I have included names like TGE, RTLR and ENLC in this group of midstream names, and haven’t including the shipping names that remain in the MLP bucket despite being taxed as corporations for the most part.  The inclusion of TGE and ENLC in this group originally stemmed from their existence as general partner holding companies, back when we had many of those.  But if I were to move TGE and ENLC to the MLP chart, it would leave this midstream corporation group barren with just a few true corporations.  So, for now at least, I am sticking with midstream up-C partnerships in the Midstream Corporation charts and the shipping MLPs in the MLP charts.  It’s all semantics and eventually there may be few enough companies just to do one chart that is agnostic to tax status.

Canadian Midstream

Pembina traded well on the removal of KMI’s ownership of shares.  Beyond that, not much change in pricing week over week for Canadian stocks.  A few names may have been pressured by rotation within the relatively insular Canadian market as funds perhaps flowed from Inter Pipeline, TRP, Keyera and into Pembina.

ENB continues to trade well.  Pembina’s big week jumped it to the top of the YTD leaderboard.  It is very early in the year, but there may be some greater divergence of returns in Canadian midstream this year vs. last year when the group moved in lock step higher.

News of the (Midstream) World

So many debt offerings this week.  It was as if the oil price spike over the weekend was the signal for energy stocks to hit the road to get their bond deals done before the window closed.  In addition, WES traded well on the announcement of potentially better governance and a new structure separate from its sponsor, who is much less supportive than before the OXY purchase.

Capital Markets

  • Energy Transfer (ET) priced public offering of $4.5bn of senior notes and $1.6bn of preferred units (press release)
    • $1.0bn of 2.900% notes due 2025 at 99.924% of par
    • $1.5bn of 3.750% notes due 2030 at 99.843% of par
    • $2.0bn of 5.000% notes due 2050 at 99.914% of par
    • Preferred units comprised of $500mm of 6.750% Series F Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Units and $1.1bn of 7.125% Series G Fixed-Rate Reset Cumulative Redeemable Perpetual Preferred Units
  • Enterprise Products (EPD) priced public offering of $3.0bn of senior notes (press release)
    • $1.0bn of 2.800% notes due 2030 at 99.921% of par
    • $1.0bn of 3.700% notes due 2051 at 99.413% of par
    • $1.0bn of 3.950% notes due 2060 at 99.360% of par
  • Pembina (PPL-CA) announced $1bn of senior unsecured notes (press release)
    • $250mm of 3.62% notes due 2029
    • $250mm of 4.02% notes due 2028
    • $500mm of 4.75% notes due 2048
  • KMI sold all 25mm Pembina shares for after-tax proceeds of $764mm, which will go to paying down debt (press release)
    • The shares were originally received by KMI in connection with PPL’s acquisition of the outstanding common equity of Kinder Morgan Canada Limited
    • This was probably quicker than most expected, although body language was that it would be cleared up by analyst day in late January at the latest
  • Western Midstream (WES) priced $3.5bn of senior notes (press release), including:
    • $300mm of floating rate notes due 2023
    • $1.0bn of 3.10% senior notes due 2025 at 99.962% of face value
    • $1.2bn of 4.05% senior notes due 2030 at 99.9% of face value
    • $1.0bn of 5.25% senior notes due 2050 at 99.442% of face value
  • Genesis Energy (GEL) priced $775mm of 7.75% senior notes due 2028 (press release)
  • Kimbell Royalty Partners (KRP) priced offering of 5.0mm units at $15.50/unit, raising $77.5mm in gross proceeds (press release)
    • Overnight offering, priced at 10.8% discount to prior close

Growth Projects / M&A

  • Kimbell Royalty Partners (KRP) announced $175mm acquisition of mineral and royalty interests from Springbok Energy Partners in a cash and unit transaction (press release)
    • Purchase will be done with $95mm in cash and $80mm in common units
  • Private company Outrigger Energy II announced it has entered into long-term gas gathering & processing agreements with XTO Energy (XTO) to service production in North Dakota’s Williston Basin (press release)
    • Outrigger will develop a 70-mile rich gas pipeline from Williams County that terminates at a new 250 mmcf/d processing plant that will provide direct market access via ONEOK’s NGL pipeline system
    • Outrigger Energy II is backed by NGP Energy Capital Management

Other

  • Noble Midstream Partners (NBLX) appointed Robin Fielder President and COO of NBLX and SVP, Midstream of Noble Energy (NBL) (8-K)
    • Fielder served most recently as President, CEO, and Director of WES and SVP, Midstream and Marketing at Anadarko from 2018-2019
  • Western Midstream Partners (WES) announced entry into new service, operating, and governance agreements with Occidental Petroleum (OXY) that will enable WES to fully operate as a stand-alone business (press release)
    • Some terms include the transfer of WES’s management team from OXY to WES, the provision of limited administrative shared services by OXY to WES for an initial two-year period, and a $20mm cash contribution by OXY to WES during 1Q20 in recognition of WES’s historical financial support of existing administrative infrastructure
  • EnCap announced initial $400mm equity commitment to Edgewater Midstream (press release)
  • Enbridge (ENB-CA) withdrew its terminal application for the Colt VLCC terminal, making the VLCC project with Enterprise (EPD) its sole focus for export projects