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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

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Week Thoughts: Grand Gesture from MLPs

After a pit stop to scoop up some distributions last week, midstream stocks resumed their rally with another big week.  It was a big week across the energy sector, buoyed by oil the highest oil prices of the year and a big week for the stock market broadly.

Midstream outperformed the S&P 500 and utilities. MLPs ruled the midstream space this week, with a 5% total return, but still trail broader midstream by wide margins YTD and YOY. The AMNA is up 24.7% off the Christmas Eve bottom.

Earnings so far have been ok. The fourth quarter proved to be challenging for many MLPs (DCP, WES, MMLP, etc.) it appears, but generally 2019 outlooks remain intact. In a risk-on week across the energy and commodity complex, the market was happy to give midstream companies a pass for 4Q hiccups. It’s safe to say most of us are happy to act like 4Q never happened.

Next week, this marathon earning season continues with results from ET, TRGP, ENLC, CEQP, ENBL, SHLX. NBLX, USAC, DKL and others report. Chances are we get some movement on IDRs from one of the few remaining MLPs with IDRs, with potential news from SHLX, NBLX, or DKL on the subject.

Valentine’s Gains

Valentines Day is when you make up for all your relationship shortcomings with an over the top romantic gesture. If you’re Kanye West, that gesture is having Kenny G play you a solo in a room filled with roses. If you’re MLPs, that gesture is a 5% total return week.

Later on in your relationship (like say after 15 years of marriage) you and your spouse may fall back on the cop-out “every day is Valentine’s day for us, so maybe we can both agree not to celebrate this hallmark-created commercialism.” Maybe in midstream this year, every day can be Valentine’s day and the rally sustains itself. That would be great, because like the grand gesture from the end of Wedding Singer, many MLP investors would love to grow old with their MLPs…so their estate can eventually get that step-up in basis.

Winners & Losers

NGL had a good quarter that beat expectations and investors fell all over themselves to buy it all week for a massive 25.7% gain on the week.  AM likewise posted good quarterly results and outperformed, but not by as much as NGL.  On the downside, MMLP had weaker results, but indicated 2019 would be better, and the stock recovered from initial weakness.

MMLP made it two straight weeks in the bottom 5, but there were no repeats in the top 5.  On the YTD leaderboard, NGL and GMLP vaulted into the first and second spots, pushing SMLP and HESM down a couple of spots.  Only one MLP in the universe is negative after this week’s gains.

General Partners and Midstream Corporations

In the midstream corporation and GP group, there were no negative performers and SEMG led the way with 10% gains.  WGP traded well despite some noisy 4Q results.  WMB’s in-line results were met with limited enthusiasm.

On the YTD leaderboard, each of the top 5 is up 20%+, TRGP is on top and only one stock is negative.  AMGP rejoined the top 5 this week, displacing PAGP, which is the fifth worst performer in the group with 22% return this year.

Canadian Midstream

Canadian midstream was positive but not by quite as much as the U.S. group.  ENB and TRP posted good results, IPL reported as well.  GEI bounced back from last place a week ago to lead the way, followed closely by Pembina, both on no news.  Pembina and Keyera report next week.

Pembina repeated near the top of the group, and extended its YTD lead on the rest of the group.  TRP widened its lead over ENB as well.  Outside of GEI’s volatility, the rest of the group has traded in a tight band, which is pretty typical of the Canadian midstream group.

News of the (Midstream) World

Pretty active week overall.  State Governors were active in condemning pipeline development efforts in Minnesota and Pennsylvania.  WMB and TRGP teamed up on an interesting NGL project.  One IDR elimination was announced and another one was finalized.

Capital Markets

  • None.

Growth Projects / M&A

  • EQM Midstream (EQM) announced definitive agreement with Equitrans Midstream (ETRN) to eliminate IDRs in exchange for 80mm common units and 7mm class B units (press release)
    • This agreement is slightly better than original offer of 95mm total units
    • Agreement implies approximately 11x multiple of 2019 IDR cash flow
    • The class B units convert over a three year period beginning in 2021
  • PBF Logistics (PBFX) announced IDR elimination transaction with sponsor PBF Energy (press release)
    • PBFX will issue 10mm units to PBF representing $215mm based on PBFX’s 30-day VWAP price and represents 11x 2019 IDR cash flow
  • Private company Sentinel Midstream announced new deepwater crude oil export facility located near Freeport, TX that will be able to fully load VLCC vessels (press release)
    • Facility will include an onshore terminal with up to 18mm barrels of storage, an offshore 42-inch pipeline and an offshore platform
  • Phillips 66 Partners (PSXP) and Kinder Morgan (KMI) announced joint open season for crude oil transportation from Gray Oak Pipeline origin points in the Permian Basin to KMCC delivery points at or near the Houston Ship Channel (press release)
  • Williams (WMB) and Targa Resources (TRGP) announced new NGL agreements to link Conway and Mont Belvieu markets with new pipeline projects (press release)
    • Transaction provides WMB with market optionality for DJ Basin NGL volumes from its (50%-owned) Overland Pass Pipeline down to Mt. Belvieu
    • WMB to construct 188 miles of new NGL pipeline from Conway, KS into an interconnect into Targa’s Grand Prix NGL Pipeline in Oklahoma
    • WMB will also have an option to acquire a 20% stake in one of the next two fractionation facilities being developed by TRGP at Mt. Belvieu
    • WMB expects growth capex of $350-400mm for the project at a 6x EBITDA multiple
  • Tellurian (TELL) announced it has signed a memo of understanding (MOU) with Petronet LNG Limited India (PLL) wherein PLL is exploring the possibility of investment into TELL’s Driftwood LNG facility (press release)
  • Westmoreland Resource Partners (WMLP) announced tender offer by Westmoreland Coal Company for $0.01/unit in cash (press release)
    • The old Oxford Resource Partners (OXF), which went public in 2010 at $18.50/unit (9.46% yield) in a deal that raised $162mm

Other

  • Pennsylvania Governor Wolf calls out Energy Transfer’s Mariner East 2 pipeline project for “a failure to respect our laws and our communities” (WSKG.org)
  • Minnesota Governor Walz plans to continue appeal of the PUC decision to approve Enbridge’s Line 3 pipeline (mprnews.org)
  • Upon closing of simplification after the vote schedule on 2/27, Western Gas Equity (WGP) will change its name to Western Midstream Partners and will change its ticker to WES