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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

Week Thoughts: Just Ok is Ok for MLPs

MLPs finished just above flat for the week, while non-MLP midstream stocks were negative, in a pretty quiet market for equities.  The PAA investor day and pipeline announcements seemed to move a few stocks this week, but broader midstream focus seems to have returned to weak commodity prices. 

Oil prices found some support on rising geopolitical tensions on sinking ships, but they finished the week lower overall.  Ethane closed the week at a fresh 52-week low, lowest point since January 2017.  Natural gas prices are around their lowest point since June 2016. 

Duration Matching Supply & Demand

The glut of light NGLs has been noticed and help is on the way…in 2022.  This week, Exxon and Saudi Basic Industries announced that construction will start in 3Q 2019 on a $10bn ethane cracker that would have the largest processing capacity of any facility in the world.  The 50/50 cracker is expected to be in-service in 2022. 

Long-cycle demand can’t come online fast enough to take advantage of huge short-cycle supply for natural gas and NGLs.  But it is very clear that excess local supply is competitive globally, which is creating global demand.

In the face of deteriorating commodity sentiment, midstream stocks have been resilient and have traded “ok” this month relative to other energy stocks.  Midstream stocks may need to show more resilience through the summer before demand can catch up and improve energy sentiment.

Winners & Losers

MLPs (as measured by the AMZ) traded better than non-MLPs this week.  That flat index return was helped by two of its largest constituents (PAA and EPD) posting strong returns for the week.  PAA’s investor day and new projects were well-received in the market.  On the downside, gathering & processing MLPs were hit hard, with SMLP and CNXM down similar amounts at the bottom of the group.  Friday’s negative MLP action seemed to focus on smaller G&P names like CNXM, AM, SMLP and ENLC.

MMLP went from worst last week to first this week.  GLP and NBLX went from top 5 to bottom 5.  WLKP repeated in the top 5.  On the YTD leaderboard, SRLP rejoined the top 5, replacing GLP.  The bottom 5 constituents remained the same, but CNXM dropped a spot and SMLP breached -30% return.

Midstream Corporations

Median U.S. midstream corporation return was lower than MLPs and Canadian corporations this weekand only two names in the whole group were positive: PAGP and RTLR.  As noted above, the market responded positively to the PAA new projects and the investor day materials, it appears.  RTLR will be added to midstream indexes, but otherwise no news ahead of a flurry of sell-side initiation reports that will be coming soon.

TGE, TRGP and SEMG underperformed the group again this week.  TRGP and SEMG tend to be volatile and move with commodity prices.  TGE weakness seemed related to the PAA and PSX pipeline announcements that may have reduced prospects in the market’s mind for its Rockies to Gulf Coast pipeline project.  AM and ALTM were bludgeoned after positive moves last week. 

Canadian Midstream

The group underperformed MLPs but beat median U.S. midstream corporations this week.  Gibson led the way.  TRP gave up some of its recent gains, but still managed to outpace ENB for the week. 

Gibson (GEI) repeated near the top of the group again this week, and as a result climbed another spot up the YTD leaderboard, leapfrogging Pembina (PPL).

News of the (Midstream) World

This week’s news runs counter to the narrative of capital discipline and slowdown in capex, with $4.1bn of new projects announced.  Also, that was just two projects, which runs counter to the idea of reducing exposure to big project risk.  The projects were joint ventures and do make use of existing footprints, but they don’t help concerns on over-building or concerns on persistently high leverage across midstream.

Capital Markets

  • None.

Growth Projects / M&A

  • Phillips 66 Corp. (PSX) and Plains All American (PAA) announced the formation of a 50/50 JV, Red Oak Pipeline (press release)
    • The pipeline system will provide crude oil transportation service from Cushing, OK and the Permian Basin to Houston and Corpus Christi
    • The system is expected to cost $2.5bn and the JV plans to hold a binding open season
  • Phillips 66 (PSX) and Bridger Pipeline LLC announced 50/50 joint venture, Liberty Pipeline, that will construct the Liberty Pipeline that will take Rockies and Bakken production areas to Cushing, Oklahoma (press release)
    • Pipeline expected to cost $1.6bn and expected to be in-service as early as 1Q 2021
  • Martin Midstream (MMLP) announced the sale of its membership interest in Arcadia Gas Storage to Hartree Cardinal Gas for $125mm in cash (press release)
  • NuStar Energy (NS) announced binding open season for committed refined product transportation on the expanded capacity of its Valley Pipeline System in South Texas (press release)

Other

  • Alerian announced the following updates to its index series (press release):
    • Rattler Midstream (RTLR) to be added to Alerian Midstream Energy Index (AMNA), Alerian U.S. Midstream Index (AMUS), Alerian MLP Index (AMZ) and Alerian MLP Equal Weight Index (AMZE)
    • Equitrans Midstream Corp (ETRN) to be added to AMEI, EQM Midstream Partners (EQM) will be removed
  • Legacy Reserves (LGCY) filed bankruptcy and reached agreement with lenders for restructuring (press release)