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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

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Week Thoughts: Margin Expansion, Marginal Gains

Midstream was positive this week, led by non-MLP midstream stocks, which outperformed MLPs (AMNA +1.2% vs. AMZ -0.3%).  Midstream slightly outperformed utilities (UTY -0.8%), helped by a bounce back in broad equities and a strong set of 3Q results from big midstream players.  Midstream performance was impressive given the precipitous decline in oil prices this week, a 14 bps increase in the U.S. 10-year yield.  Midstream also had to contend with seasonal ex-date volatility and month-end window-dressing immediately ahead of an election week.

In the E&P space this week, there were 3 large all-equity mergers announced (Denbury, Chesapeake, Encana), and in each case the market responded negatively, with -16% relative underperformance vs. XOP for each deal.  The transactions were credit positive for the acquirer, but also sent a negative message to the market on the existing assets of those acquiring companies.  Midstream stocks also had to contend with those rather large distractions, and the negative stigma these deals placed on the energy sector broadly.

Margin Expansion + Unit Stability = High Returns

Bellweather EPD reported 3Q results this week and highlighted a number of impressive statistics.  The number that really jumped out was $1.6bn of excess retained distributable cash flow in the first 9 months of the year.  The midstream 2.0 model is working for EPD, and with numbers like that, it doesn’t really matter if the market rewards them with a higher stock price because they don’t need to issue equity.  Other notable large cap midstream 2.0 adherents also posted impressive results this week, including MPLX, WMB, OKE and MMP.

While it is frustrating to see big quarterly beats by major midstream players with limited positive stock reaction and follow through, patience and conviction should eventually be rewarded when positive fundamentals continue to flow through into strong cash flow per share growth.

Quick Hits Around the Sector

  • Final Cuts? BPL cut distribution 41%
    • Two big cuts that were seen as overhangs have now cleared: ETP, BPL.
    • Backdoor cuts still pending: DM, EEP, SEP, ENLK.
    • Potential backdoor cuts: EQM, ANDX.
    • Edging closer to a sector-wide yield that doesn’t have risk of massive cuts, potentially clearing the way for more retail interest in MLPs eventually
  • NGL fundamentals confirmed by strong results out of EPD, OKE, MPLX
    • Stay tuned for more NGL results with TRGP and ET this week
  • Asset sale by Dominion of high growth Marcellus assets for 14-16x EBITDA is a positive read through for other Marcellus midstream operators who have been largely ignored this year
    • Timing of this spotlight on Marcellus was positive, because it came in a week when MPLX and WMB posted strong results and operating leverage in that region

MLP Status Update: October

The MLP Index closed October down 8.0%, including distributions, making 3 straight years when October has been negative by at least 4%.  It the worst October on record for the index, but it wasn’t even the worst month this year for the Index, which saw -9.7% total return in February. October is typically a strong month for MLPs (index was flat in October 2008, bookended by the two worst months in the history of the sector at -17% each).

Looking ahead, November is typically weak, producing the lowest average and median return of any month since 1996.  The best November ever for the MLP Index was 6.4% in 2009.  If MLPs rebounded on some as of yet unknown catalysts, perhaps election relief, a trade deal, earnings momentum, or an oil price spice, MLPs could threaten that 6.4% record without much trouble given the severity of October’s downdraft.

Midstream Status Update

Winners & Losers

There was some evidence of follow through this week, at least for small MLPs with heavy retail followings like MMLP and GLP, which both repeated near the top of the group this week.  MMLP reported results last week and GLP announced a distribution last Friday.   ENLK showed some negative follow through this week with a second straight bottom 5 finish.  CEQP’s solid quarterly results and reiteration of 15% annual DCF/unit growth sparked selling for some reason.

Two coal-related MLPs CCR and NRP lead all MLPs in performance year to date, dethroning CEQP this week.  Also, each of the top 5 has produced 30% or greater total return.  SHLX posted a very strong quarter of results and announced an IDR waiver that seemed to be a peace offering by the sponsor ahead of a more permanent IDR solution, but SHLX was negative on the week and earned a return trip to the bottom half of the YTD leaderboard, alongside fellow IDR-challenged MLP EQM.

General Partners and Midstream Corporations

WMB’s results were well-received on Thursday and held up through a volatile Friday to put WMB at the top of the Midstream corporation group this week.  Others in the top 5 (LNG, PAGP, SEMG) showed a high level of volatility, but finished positive.  On the downside, it was the pending simplifiers at the bottom of the group (ENLC, AMGP and EQGP).

Those pending simplifiers were also near the bottom last week, perhaps an indication of a lack of interest in buying them ahead of closing, or perhaps reflecting a lack of indexes including those stocks which are neither MLPs nor corporations, so they tend to be ignored.

On the YTD leaderboard, it is notable that the median return in this group is roughly -11%, whereas the market cap weighted performance is much better.  WMB climbed out of the bottom 5, replaced by another pure play general partner.

Canadian Midstream

Canadian midstream traded relatively well this week, especially on a market cap weighted basis.  TRP, ENB and PPL reported results and all were good, with Pembina’s actually very good.  Inter Pipeline was in the news with its acquisition of terminals in Europe from NuStar, funding it with a small bought deal.  Keyera’s weakness might be somewhat due to rotation among Canadian investors who may have sold it to buy into that bought deal for IPL or into others who reported good results.

On the YTD leaderboard, Pembina took over 3rd place on Keyera’s attrition.

News of the (Midstream) World

More big asset sales this week, with participation on the other side by both public and private companies. More growth projects from the big players in the sector.  A surprising amount of transaction news for an earnings week.

Capital Markets

  • Inter Pipeline (IPL-CA) priced offering of 9.6mm share at $20.80/share, raising $200.1mm in gross proceeds in a bought deal in Canada (SEDAR)
    • The transaction priced at a 2% discount to prior closing price

M&A / Growth Projects

  • Buckeye Partners (BPL) announced the sale of its equity interest in VTTI B.V. for $975mm and the sale of a package of non-integrated domestic pipelines and terminal assets for $450mm in cash (press release)
    • The sales along with an announced 41% distribution cut are designed to maintain BPL’s IG credit rating by reducing leverage and eliminating the need to issue equity to fund annual growth capital
    • The asset package includes a jet fuel pipeline, pipelines and terminal facilities serving airports in NV, CA, and TN, and refine petroleum products terminals in CA
    • BPL repeatedly cited a multiple of 12x next year’s EBITDA, but most analysts pegged the multiple closer to 10x
  • Dominion Energy (D) announced the sale of its 50% interest in Blue Race Midstream to First Reserve for up to $1.5bn (press release)
    • Blue Racer provides natural gas gathering, compression, dehydrating, treating, processing, fractionation, and transportation services, forming an interconnected midstream business in the Utica and Marcellus Shale
    • Total $1.5bn consideration includes $1.2bn of cash and up to $300mm in earn-out payments that would be payable from 2019 through 2021 based on Blue Racer’s performance
    • D announced the transaction price represented 14-16x 2018 EBITDA
    • WMB owns an interest in the remaining 50% of Blue Racer through it’s investment in Caiman Energy II, so this transaction is a positive valuation read through for WMB, which trades at a multiple well below 14x
  • Enterprise Products (EPD) announced plans for an incremental 150,000 bpd expansion to its NGL fractionation facilities at its Mont Belvieu complex (press release)
    • Expansion increases EPD’s total NGL fractionation capacity to 1.5mm bpd
    • Project is expected to be completed in 2Q20
  • EPD also announced it has begun construction of its seventh natural gas processing plant in the Delaware Basin (press release)
    • The facility is expected to begin service in 1Q20, will have capacity to process 300 MMcf/d, and ability to extract in excess of 40,000 bpd of NGLs
  • Pembina Pipeline (PPL-CA) announced $1.3bn of new secured growth projects including processing and pipeline capacity in support of producers in the Montney and Duvernay plays in Canada (press release)
    • Pembina’s backlog of secured growth projects now stands at $3.1bn and should generate $300mm to $450mm in annual EBITDA
  • TransCanada (TRP-CA) announced a $1.5bn expansion of its NOVA Gas Transmission System to connect WCSP supply to incremental market demand (press release)
    • The expansion is underpinned by 1.1 bcf/d and consists of 122 miles of large diameter pipeline, three compression units, meter stations, and associated facilities
    • Majority of capex is expected to occur in 2021 and 2022 pending on regulatory approvals
  • Inter Pipeline (IPL-CA) announced the acquisition of NuStar Energy’s (NS) European bulk liquid storage business for C$354mm (press release)
    • Transaction price implies an 8.9x future EBITDA


  • Shell Midstream (SHLX) announced $50mm of IDR waivers in 2019 (press release)
    • This announcement was refreshing after little progress from other MLPs that are still growing L.P. distributions (like PSXP, WES, NBLX)

Distribution Announcements

Shout out to the CEO who replied and said he didn’t see his company’s distribution announcement here.  That’s because I typically only list the ones who announced that week, and that company had already announced its distribution for the quarter.  It’s certainly possible for me to post the entire sector’s distribution announcements in a single chart, so I’ve done that this week, with a bonus summary table as well.

With 79 announcements in total, 3 cut distributions, while 32 increased quarter over quarter.