Midstream started the week strong Monday, but the bounce back was short-lived as midstream sold off each of the remaining days of the week, even as oil prices stabilized and the broad market rallied. Canada and a few larger corporations dragged down broader midstream indexes relative to the MLP Index, which continues to hold up well in a backdrop of upstream carnage.
Midstream earnings season ramps up this week, with EPD, OKE, WMB, TRP-CA, MMP, ENB-CA, WES, CEQP, AM, MPLX and others reporting. Investors remain wary of potential impacts of cratering natural gas and NGL prices on currrent results and updated outlooks across the space. In addition, strategic announcement potential is high with the likes of WES, NBLX, AM and SHLX among those with serious overhangs that will be in focus. Buckle up.
More Pigs in the Python
The San Diego Comic Con, the biggest comic book convention in the world, just wrapped up its 50th convention a few days ago. Sequels to Terminator and Top Gun grabbed some headlines, but the big reveal was Phase 4 of the Marvel Cinematic Universe. The next phase includes more than 8 new films and 5 new TV shows.
While that next phase is likely to produce many billions in box office and ancillary revenue resulting in very high returns to Disney, the announcements weren’t met with as much enthusiasm as they used to be. Is the world really asking for another 12 new Marvel products after the recent crescendo that wrapped up the Thanos / Infinity War storylines?
Similarly, in the midstream world, 2019 should represent a crescendo of growth capital expenditures. As discussed in last week’s Summer Cliff Notes post (read it here), the market has little patience to endure another round of large capital projects that will forestall free cash flow harvesting.
Midstream has always been a sector with management teams more focused on commercial dominance than really anything else. Breaking those habits will be an ongoing challenge for midstream management teams, but investors have to be willing to shift their focus away from growth mentality that demands ever-replinished growth capital backlogs.
Back Out Behind the Woodshed for Natural Gas and NGL Prices
Last week, I wrote about the negative energy sentiment pervasive in the current market. I asked you readers where you thought we were (what inning) of the negative energy sentiment. Less than 30% of respondents chose “Late innings”, which means the rest of you are resigned to an even more prolonged negative energy cycle. Those results were validated this week for sure.
As the marginal cost of producing a molecule of natural gas approaches $0 across the globe, and not just in West Texas, investors continue to run to exit natural gas-focsued upstream companies, trampling gas-focused midstream operators underfoot in the stampede.
Ethane prices dropped more than 30% and closed the week at $0.12/gallon, unprecedented levels for the shale era. Ethane prices are down 65% year over year as export capacity and domestic petchem demand isn’t coming online fast enough to soak up all the supply. If global demand for the output of petchem plants were stronger, new crackers might be in more of a hurry to come online.
As discussed here before, U.S. supply is more dependent than ever on global growth and emerging market demand growth. That makes midstream operators that store and transport that supply dependent on global growth (and trade war resolutions) as well.
Winners & Losers
The Bloomberg report that Blackstone is seeking a buyer of its CQP stake at a premium was a positive catalyst for CQP this week. Others in the top 5 had less clear positive catalysts, although GLOP did report earnings. On the downside, MMLP was down 20% Thursday after reporting weaker than expected results and lowering its outlook.
ET gave up its rumor-induced gains from last week. CAPL repeated in the top 5. TOO repeated in the bottom 5. On the YTD leaderboard, NGL and USAC held up, and NS joined the top 5. In the bottom 5, CNXM and SMLP were both positive despite general angst for those with any Northeast G&P exposure.
WMB was down sharply Friday on news that Cabot reduced 2020 production outlook, in a very skittish market for all things related to the northeast natural gas outlook. KMI led all midstream corporations this week, bouncing back and probably benefitting from rotation out of WMB this week. AM repeated in the bottom 5 on deteriorating sentiment around northeast gas producers.
ETRN was positive Thursday even as its sponsor’s stock price collapsed after new management indicated some less draconian than feared outcomes of negotiations and share sales were possible. On the YTD leaderboard, PAGP leapfrogged WMB near the top of the group, while each of the bottom 5 is now negative YTD.
Each of the 7 names in Canadian midstream were negative this week. ENB was down the most on a fresh legal challenge for its Line 5 project. Smaller names (ex-KML) like IPL, Gibson and Keyera outperformed this week.
ENB repeated again at the bottom of the Canadian Midstream group this week. KML went from first to second worst. No change to the order of the YTD leaderboard.
News of the (Midstream) World
Another big IDR elimination came to pass this week. The valuation seemed egregious and the stated multiple was based on suspect assumptions of future IDR cash flow. Only a few large IDR removals remain pending, most notably SHLX, DCP and NBLX. IN other news, OKE added another $700mm to its already expansive expansion capex program.
Growth Projects / M&A