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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Flagging into Earnings Barrage

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.

Midstream Corporations

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.

Canadian Midstream

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.

Capital Markets

  • Global Partners priced private offering of $400mm of 7.00% senior unsecured notes due 2027 (press release)

Growth Projects / M&A

  • Phillips 66 Partners (PSXP) announced the elimination of its incentive distribution rights (IDRs) owned by PSX in exchange for 101mm newly-issued PSXP common units (press release)
    • PSX will own 75% of PSXP’s outstanding common units after the transaction closes 8/1
    • The new units represent $5.4bn in value, based on prior day’s closing price
    • PSXP reported the transaction represents a 16.7x multiple of 2020 GP cash flows, but to reach that 2020 GP cash flow, PSXP would have to accelerate distribution growth
    • The multiple is 19x of current GP cash flow, well above recent comparable transactions
  • ONEOK (OKE) announced $700mm in new natural gas and NGL infrastructure projects to be developed over next 2 years, including (press release):
    • A 200 MMcf/d expansion of the Bear Creek (Bakken) natural gas processing facility
    • Mid-Continent NGL fractionation facility expansions totaling 65,000 bpd and additional NGL infrastructure between the Elk Creek and Arbuckle II pipelines
    • A 40,000 bpd additional expansion of the West Texas LPG pipeline
    • OKE expects to finance the projects with cash and debt, and no equity issuance
  • Williams (WMB) announced that it acquired and placed into service Norphlet deepwater gathering pipeline system constructed by Shell Offshore and CNOOC (press release)
    • The natural gas pipeline system has capacity of 261-291 MMcf/d


  • Blackstone reported to be considering sale of its stake in Cheniere Energy Partners (CQP) (Bloomberg)
    • Blackstone owns 58% of CQP’s outstanding common units and is seeking a premium for its stake and is marketing it to a small number of infrastructure, pension, and sovereign wealth funds
  • Targa Resources (TRGP) announced a management transition plan (press release)
    • Effective March 1, 2020, current President (Matthew Meloy) will become CEO and will be elected to the board
    • Current CEO, Joe Bob Perkins, will remain a member of the management team and will become Executive Chairman of the board
  • Alerian announced Andeavor Logistics (ANDX) will be removed from Alerian Index series in a special re-balance on July 29th (press release)

Distribution Announcements

  • 33 distribution / dividend announcements this week:
    • 13 quarter over quarter distribution increases
    • 15 year over year distribution increases
    • Sponsored MLPs NBLX (+20%), SHLX (+18%), HESM (+15%) and CNXM (+15%) continuing their very high annual distribution growth rates
    • DKL: accelerated distribution growth of 3.7% this quarter vs. +1.2% last quarter, 26th straight increase since IPO
    • MPLX: 26th straight quarterly increase since IPO
    • SHLX: 18th straight quarterly increase since IPO
    • NBLX: 11th straight quarterly increase since IPO
    • ARLP: 9th straight quarterly increase after its cut in 2016
    • CQP: 8th straight quarterly increase after holding distribution flat for 42 quarters since IPO
    • HESM: 8th straight quarterly increase since IPO
    • ET: 6th straight flat distribution
    • One distribution cut from an irrelevant MLP (SDLP)