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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Five Years Since Midstream Peak: Universe Update & In Memoriam

The end of next week, the last trading day of August, will be the 5-year anniversary of the peak of the Alerian MLP Index.  The peak came well after oil prices peaked (mid-July 2014), with the final surge through the end of August driven by Kinder Morgan (KMI) announcing a buyout of its subsidiary MLPs (KMP, EPB, KMR) at large premiums.

Below I run through charts and lists of transactions since the 2014 peak. But before that, let me lead with the key takeaways I gleaned from the information that follows.

Key Takeaways

  • Quality and size matters: The MLP Index return since the peak has been abysmal, but the worst of the returns came from outside the top 5 largest MLPs
    • The returns chart below shows that in order to underperform the AMZ, you’d have to own anything but what is listed in the chart
    • In other words, owning most combinations of Canadian midstream, the largest U.S. corporations (OKE most notably), and the top 5 largest MLPs would have beaten the AMZ return by a wide margin
  • There has been tons of consolidation and rationalization, resulting in a leaner industry overall that may be poised to perform better in the future
    • On the other hand, 80+ fewer tickers makes for a tough business environment for active MLP managers
  • The future looks bright for a select few large players, having cleaned up most of the trash and excess of the industry, including MLPs that should not have existed and usurious IDR structures

Returns Since the Peak

Below is a chart summarizing total return of different baskets of MLP and midstream stocks alongside the MLP Index return.  Only 3 of the top 10 largest MLPs in August 2014 still exist today (EPD, PAA, MMP).  That makes assessing the performance of the MLP sector challenging outside of using an Index. 

So, for KMP and WPZ, I calculated a return since 2014 based on the cash and units offered in each merger to back into what a unit of the MLP would be worth in shares of the ultimate corporation it became.  I could have gone back and run similar numbers for the others in the top 10 that no longer exist (ETP, SEP, OKS, ACMP, MWE), but opted instead to limit the analysis to the top 5 largest names.

Right-Sizing Update: MLPs no Longer a Sector

After accounting for all the rationalization and consolidation of tickers that we’ve seen since August 2014, the chart below captures where the universe is today.  The midstream MLP universe is around $250bn and now has less than 20 names with $2bn in market capitalization. 

By including the broader universe of corporations in both the U.S. and Canada, we get to a more institutional grade sector, but our contention is that we can access that group of stocks better with a focused approach within a global listed infrastructure strategy.

For the stocks that remain viable in this new era, we believe the future is bright.  Fewer, large-scale players improves the bargaining power of the midstream companies relative to the producer customers.  If low returns of some of the private infrastructure acquisitions end up scaring away some of the more aggressive private equity capital, publicly-traded midstream operators may find themselves in an even better position. 

Check-in on the Major Players

Who are those major players today?  The chart below highlights the current list and puts it alongside the major players 5 years ago.  MPLX and ET have grown larger after ET consolidated its own entities and MPLX acquired two large MLPs.  Spectra is no longer in the universe, which has helped ENB grow into the largest midstream company.  Also, OKE has become a much larger player overall through its ability to execute through the downturn.

Midstream 2.0 Compliance Increasing

The chart below is a way of gauging the overall health of the midstream sector based on 3 basic metrics we believe to be representative of a sustainable midstream model: leverage below 4.0x, coverage above 1.2x and no IDRs.  In recent years, midstream stocks have improved their financial positions by simplifying structures, increasing coverage (through 75+ distribution cuts), and de-leveraging. 

While midstream financials have improved from a high level, the overall valuation of the sector ahs improved as well.  Average valuation of midstream stocks has de-rated from around 15x at their peak to around 10x EBITDA today, although there is wide disparity within that average.

In Memoriam: August 2014 through August 2019

Below, in bullet point format, is a list of the ticker symbols across the midstream and MLP universe that have disappeared since the August 2014 peak.  In total, 73 names have been removed from the universe (or become irrelevant due to size).  In addition, a further 9 tickers that were created after the peak are gone too (names like DM, PTXP, RMP). 

Names gone in last 5 years:

  • Kinder Morgan (KMP), Kinder Morgan Management (KMR) and El Paso Pipeline (EPB) – bought by Kinder Morgan, Inc (KMI) in deal that closed in November 2014
  • Original Williams Partners (WPZ) – bought by Access Midstream (ACMP) in deal announced in 2014, changed name to Williams Partners (WPZ)
    • Surviving WPZ – bought by Williams Companies (WMB) in deal announced in 2015 and again in 2018 (closed in 2018)
  • Oiltanking (OILT) – G.P. bought by Enterprise Products (EPD) in October 2014, EPD announced buy-in of outstanding units in November 2014
  • Atlas Pipeline (APL) – bought by Targa Resources (NGLS) in deal announced in 2014
    • Atlas Energy, LP (ATLS) – bought by Targa Resources Corp (TRGP) in deal announced in 2014
  • Targa Resources Partners (NGLS) – bought by Targa Resources Corp (TRGP) in deal announced in deal announced in 2015
  • Regency Energy (RGP) – bought by Energy Transfer (ETP) in deal announced in 2015
  • MarkWest Energy (MWE) – bought by MPLX in deal announced in 2015
  • QEP Midstream (QEPM) – GP of QEPM sold to Tesoro Logistics (TLLP) in 2014, remainder of QEPM bought by TLLP in 2015
  • Crestwood Midstream (CMLP) – bought by Crestwood Equity (CEQP) in transaction announced in 2015
  • Niska Gas Storage (NKA) – bought by Brookfield in 2015
  • Spectra Energy Corp (SE) – bought by Enbridge (ENB) in transaction announced in 2016
  • Rose Rock Midstream (RRMS) – bought by Semgroup (SEMG) in 2016
  • VTTI Energy (VTTI) – bought by Buckeye (BPL) in deal announced in 2016
  • Original Energy Transfer Partners (ETP) – bought by Sunoco Logistics (SXL) in deal announced in 2017, changed name to Energy Transfer (ETP)
    • Surviving ETP – bought by Energy Transfer Equity (ETE) in deal announced in 2018, renamed Energy Transfer (ET)
  • Veresen (VSN) – bought by Pembina (2017)
  • Oneok Partners (OKS) – bought by ONEOK, Inc. (OKE) in 2017
  • Marlin Midstream / Azure Midstream (FISH/AZUR) – Filed for bankruptcy in 2017, sold assets to Enterprise (EPD)
  • Worldpoint Terminals (WPT) – bought by private sponsor in 2017
  • Midcoast Energy (MEP) – bought by Enbridge (ENB) in 2017, then sold to private equity
  • ARC Logistics (ARCX) – bought by subsidiary of Warburg Pincus in 2017
  • NuStar Holdings (NSH) – merged into NuStar Energy (NS) in 2018
  • Tallgrass Energy (TEP) – bought by Tallgrass Energy GP (TEGP) in 2018
  • Western Refining (WNRL) – bought by Andeavor Logistics (ANDX) in 2018
  • TransMontaigne (TLP) – bought by Arclight in deal announced in 2018
  • Boardwalk Pipeline (BWP) – bought by Loews in option exercise deal in 2018
  • Valero Energy Partners (VLP) – bought by Valero Energy (VLO) in deal announced in 2018
  • Enbridge Energy (EEP), Enbridge Energy Management (EEQ) and Spectra Energy Partners (SEP) – bought by Enbridge in 2018
  • Alliance Holdings (AHGP) – merged into Alliance Resource Partners (ARLP) in 2018
  • Cheniere Energy Partners LP Holdings, LLC (CQH) – bought in by Cheniere Energy (LNG) in 2018
  • Western Gas (WES) – bought by Western Gas Equity (WGP) in deal announced in 2018, name changed to Western Midstream (WES)
  • EnLink Midstream Partners (ENLK) – bought by Enlink Midstream (ENLC) in deal announced in 2018
  • Andeavor Logistics (ANDX) – bought by MPLX in 2019
  • Suncoke Energy Partners (SXCP) – bought by Suncoke Energy (SXC) in deal closed in 2019
  • Amerigas Partners (APU) – bought by sponsor UGI Corp in 2019
  • Buckeye Partners (BPL) – bought by IFM in 2019
  • American Midstream (AMID) – finally bought in by Arclight after several buy-in announcements, closing in 2019
  • Southcross (SXE) – agreed to be acquired by AMID, then terminated transaction, continues to exist at less than $5mm market cap
  • Upstream, Coal, Refining and Services MLPs gone or irrelevant: APLP, MEMP, LINE, LNCO, LGCY, LRE, VNR, MCEP, BBEP, EVEP, ARP, NSLP, EMES, OXF, RHNO, RIGP, NTI, CVRR
  • Other MLPs that exist but with sub $200mm market caps: FGP, FELP, SNMP, RHNO, TOO, BKEP, DLNG, HCR, SDLP, NMM, CPLP

Names that came after the peak and are already gone:

  • Antero Midstream Partners (AM) – IPO in 2014, bought by AMGP in transaction announced in 2018
  • Dominion Midstream (DM) – IPO in 2014, bought by Dominion (D) in 2018
  • EQT GP Holdings (EQGP) – IPO in 2015, bought by EQM in 2018
  • Rice Midstream (RMP) – IPO in 2014, bought by EQM in 2018
  • PennTex Midstream (PTXP) – IPO in 2015, general partner bought by Energy Transfer in 2016, rest of outstanding PTXP units bought by ETP in 2017
  • Columbia Pipeline Partners (CPPL) – IPO in 2015, bought by TransCanada in deal announced in 2016
  • Columbia Gas (CPGX) – spin off from Nisource in 2015, acquired by TransCanada in 2016
  • JP Energy Partners (JPEP) – IPO in Oct 2014, agreed to merge with AMID in 2016
  • Kinder Morgan Canada (KML) – IPO in 2017, bought by Pembina in 2019