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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: From Russia, No Love for Midstream

Midstream captured more downside, selling off again this week but for a different reason.  Last week, midstream was down alongside the rest of the stock market.  This week the market finished flat, utilities finished sharply higher with a big interest rate drop, but midstream sold off again.  This time midstream was slammed by an oil price collapse after disappointment from OPEC and Russia discussions.

Friday’s 7.1% decline for the AMZ was its worst single day performance in more than 4 years and the 4th worst day ever for that index.  The worst days ever for each of the AMZ and AMNA are below, along with returns over the following 30 days that may offer some hope to MLP investors.  Large midstream corporations like KMI, TRP and ENB held up much better this week and helped the broader midstream index (AMNA) outperform energy stocks by a wide margin. 

Things feel almost like they are conspiring against the midstream sector, with a virus-driven global demand shock followed by another OPEC meeting failure.  The cycle remains vicious for midstream, with negative news building on itself to dash the hopes of midstream investors hoping that a double-digit yield could be sustained in a sub 1.00% 10-year yield environment.

As I wrote a few weeks ago, there isn’t one single thing that can come along and fix everything like the fairies you come across in Zelda.  First the negative cycle must be broken, then positives can emerge and start building on each other. 

Midstream for a brief time in 2016 did build some positive momentum, with help from large equity capital raises by producers that calmed the market down and midstream stocks were able to build from there the rest of the year.  It doesn’t feel like the equity capital markets are willing to step up again, and it doesn’t feel like the market has patience for further dilution.  coming together to crush the stocks and to dash the hopes of midstream investors hoping that a double-digit yield could be real.

Its not a conspiracy, however, the answer is midstream companies are simply not well prepared enough for the 100-year storms that continue to show up.  The balance sheets and payout ratios and investor bases still remain too fragile.


Winners & Losers


There were a few positive MLPs this week, including coal MLP CCR up more than 8% for the overall win.  TCP was the best of the midstream MLPs, catching a defensive bid like its parent company TRP.  On the downside, each of the bottom 5 was down more than 20% again this week, but it was SMLP at -30% that performed worst of all.

CCR repeated in the top 5. NBLX repeated in the bottom 5 with consecutive 20% decline weeks, which was only bad enough to land it as the 5th worst performing MLP this year.  GEL is the worst performing midstream MLP at -57%, including distributions.

Midstream Corporations

KMI outperformed the group Friday and was able to hold on to a slightly positive week, one of the few green names in the sector this week.  The rest of this group was negative, and the median return was lower than the MLP Index and well below the market cap weighted average performance of the midstream group overall.  OKE and TRGP were positive heading into Friday, and both had more than 100% of their weekly drawdown happening on Friday, as they both collapsed with oil prices.  OKE’s large decline is unusual for what has been a darling of the midstream group.  The general thought is oil prices this low discourage development in the Bakken, where both OKE and TRGP have significant operations.

HESM and AM repeated in the top 5 of this group, with AM somewhat of a surprise given its generally poor performance when commodity prices are declining.  PAGP, TRGP, RTLR and ETRN all repeated in the bottom 5 this week.  On the YTD leaderboard, each one of the bottom 5 is down 40% and the median return is -30% for the group overall.  The 5th best performer is down 25%.

Canadian Midstream

TRP and ENB acted defensively and finished positive this week, which makes sense in a week when the market was positive and utilities were up, because these names are considered almost like utilities in Canada.  The rest of Canada held up ok as well, better than last week.

Keyera repeated as the worst performer of the group.  On the YTD leaderboard, TRP is the only midstream company we track with a positive return in 2020.   ENB is second down less than 5%.  Both benefit from positive fund flows from U.S. dedicated midstream investors seeking something to allocate capital towards, and they benefit from a supportive Canadian investor base in a period of low and falling interest rates.

News of the (Midstream) World

With earnings in the rear-view, news was light this week.  OKE sold a big chunk of bonds at very low rates.  The ex-NBLX team popped up again, and CEQP put out a damage control press release announcing a plant in-service and new customer agreements. Also, there were a few notable insider buys and sells.

Capital Markets

  • ONEOK (OKE) priced offering of $1.65bn of senior notes (press release)
    • $400mm of 5-year notes at a coupon of 2.20%
    • $850mm of 10-year notes at a coupon of 3.10%
    • $400mm of 30-year notes at a coupon of 4.50%
    • Spread was wider than issuance in August, but absolute rates lower
  • Westlake Chemical (WLKP) announced recommencement of $50mm at-the-market equity distribution program (press release)

Growth Projects / M&A

  • Crestwood (CEQP) announced commercial operations at Bucking Horse II Processing Plant and new G&P agreement with Occidental Petroleum (OXY) (press release)
    • Bucking Horse II is a 200 MMcf/d processing plant that brings CEQP’s total Powder River Basin capacity to 345 MMcf/d
  • Sempra Energy (SRE) announced Train 2 of Cameron LNG began commercial operations (press release)


  • Tellurian (TELL) Co-Founder Charif Souki was forced to sell another 18mm shares this week after a large sale last week, to satisfy requirements of an outstanding loan (filing)
  • Energy Transfer (ET) CEO Kelcy Warren bought 4.3mm units of ET worth approximately $45mm this week
  • Newly formed private company Delta Midstream announced investment backing by Warburg Pincus (press release)
    • Delta’s management team is the former management of team of NBLX, including CEO Terry Gerhart, CFO John Bookout IV, and COO John Nicholson
    • Delta will pursue acquisitions of midstream assets