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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Rides Market Jet Stream Higher

Midstream stocks took some lumps with earnings announcements, but strength in oil prices, energy stocks (S&P Energy +8.3%) and the S&P 500 was enough to carry midstream to a strong positive week.  Midstream indexes outperformed utilities and infrastructure indexes and are up around 10% year to date after pausing for a few weeks. 

Stocks rallied through a weaker jobs report to help the S&P 500 post its best week since November.  Energy stocks and midstream stocks couldn’t lose this week, but MMP still found a way.

Three of the largest MLPs reported results this week.  EPD and MMP followed a similar pattern of beating Factset consensus EBITDA expectations for the quarter, but then underperforming on the day.  MPLX has fared much better on its reporting days, including this week’s. 

Being large liquid MLPs in a time of general de-grossing and fund outflows over last 6 quarters has been one of the issues.  For MMP, fundamental challenges in the liquids business appear to be an issue, while EPD’s offense-ive tone doesn’t seem to be working.  EPD tried out some climate messaging this week, but the market will want to hear more at its analyst day in a few weeks.

The two names have among the lowest leverage of all MLPs and are generally regarded as good operators and management teams, for MLPs.  But being an MLP is its own headwind at this point, despite lengthy analysis and arguments to keep the structure intact.

Earnings season continues next week and for a few weeks after that.  Notable midstream companies reporting results this week include PAA (which has a history of volatility around earnings over the years), ENB and DCP.  Its not until the following week that TRP, ET and TRGP report.  Then its another week after that before WMB, OKE, LNG and Pembina report 4Q results.

Universe Update

While not quite as impactful to the overall sector, but there was another small midstream roll-up announced this week when Chevron made an opening bid for outstanding NBLX units at no premium to prior closing price.  That announcement is another opportunity to revisit where the MLP universe stands, pro forma NBLX and TCP (previously announced buy-in by TRP) being removed from the sector.

A few stats I noted earlier on Twitter:

  • There are now 28 midstream MLPs with $250mm+ in market capitalization
  • There are only 10 midstream MLPs with market capitalization of more than $4bn, including:
    • EPD, MPLX, CQP, ET, MMP, PSXP, PAA, WES, SHLX, DCP

What was once a specialized sector is now just a handful of stocks big enough for institutions to consider. The broader market doesn’t care much about distribution coverage or other formerly sacrosanct MLP jargon.  But there’s still room for those thirsty for the tempting yields, even with the extensive track record of distribution cuts.  Even with all of that, oil prices rallying past $55/bbl should continue to be a tailwind for midstream space, attracting investors with fewer scars and more faith in the forward outlook than those exiting in recent years.

Winners & Losers

MLPs

ARLP reported results Monday and expects higher coal sales and pricing this year, which combined with higher natural gas prices this week led to a big week for ARLP.  NBLX rallied on news of the no-premium takeout discussed below.  BSM raised its distribution and made the top 5, also helped by strong commodity prices.  OMP likely seeing some speculation that it might be rolled up next.  On the negative side of the ledger, MMP’s guidance disappointed a market already poised for conservative guidance.  NGL suspended its distribution and underperformed on the week.

SRLP and SHLX went from top 5 last week to bottom 5 this week.  USAC bounced back from being at the bottom last week, and NBLX went from bottom 4 to top 2.  On the YTD leaderboard, BSM and ARLP are the overall leaders in the MLP space, helped by strong commodity prices that benefit their minerals businesses.  MMP at the moment is the worst performing MLP of all in 2021.

Midstream Corporations

With ripping commodity prices this week, it is no surprise to see the top 5 corporations dominated by upstream-oriented smaller names.   KMI was an outlier on the downside, with the market maybe seeking more commodity torque and using KMI as a source.

KMI and PAGP repeated as laggards week over week.  ALTM and ENLC repeated near the top.  YTD, midstream corporations have on average kept pace with MLPs, but with less of a skew.  No 20% returns in this group, but only one outlier on the downside (ETRN).

Canadian Midstream

Strong commodity prices helped midstream stocks North of the border as well, with more upstream-facing stocks like Keyera and Pembina leading the charge.  Gibson posted a strong week after badly underperforming to start the year.  TRP, like KMI above, was likely a funding source for rotation into higher beta stocks.

YTD, Pembina is holding its lead, but Keyera climbed into second place.  Enbridge is up double digits and is the best performing mega-cap early.  Keyera and ENB report 4Q results in the upcoming week.

News of the (Midstream) World

Another MLP buy-in this week, which means another ticker lost.  But we did see some M&A action from a listed company buying midstream assets, in this case a REIT (CORR).  Finally, there was a bit of action with distribution announcements this week.

Capital Markets

  • Targa Resources (TRGP) announced expiration and results of tender offer for 5 1/8t% senior notes due 2025 with 31.6% validly tendered (press release)

Growth Projects / M&A

  • Noble Midstream (NBLX) announced bid from Chevron to acquire remaining outstanding common units of NBLX not already owned by Chevron in all-stock transaction (press release)
    • Exchange ratio implies $12.47/unit price, no premium to prior closing price and small premium to average NBLX price over last 3 months
    • CVX owns approximately 63% of NBLX units today, but the market is pricing in an expectation of a sweetened offer through negotiation with the conflicts committee at NBLX
    • NBLX went public in September 2016 IPO at $22.50/unit and traded as high as $56/unit in January 2018
  • CorEnergy Infrastructure Trust (CORR) announced acquisition of Crimson Midstream for $350mm (press release)
    • Crimson is a California regulated oil pipeline owner and operator
    • 4 pipeline systems that connect California crude production to in-state refineries producing state-mandated specialized fuel blends
  • Summit Midstream (SMLP) announced $175mm of financing commitments for its Double E pipeline project (press release)
    • Three commercial banks have committed to finance the development of Doube E
    • Lenders committed to provide senior secured credit facilities consisting of $160mm delayed draw term loan facility and $15mm working capital facility
    • Expected 4Q 2021 in-service date on track

Policy / Regulation

  • Positive news for Enbridge’s Line 3 Pipeline: Court denies tribes request to pause permits (CBS Minnesota)

Distribution Announcements

  • Blackstone Minerals (BSM) raised its distribution by 16.7% from $0.15 to $0.175, but that’s still down 41.7% from last year.
  • NGL Energy (NGL) announced temporary suspension of distribution