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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Market Party, MLPs Stay Home

Stocks of all kinds were positive in this pre-holiday week, except for MLPs.  Midstream overall lagged the broad market, despite oil and natural gas price gains.  The publicity of upstream bankruptcies (I believe 4 filed Ch. 11 this week) may have been a factor in the underperformance of MLPs.  Natural gas and ethane prices bounced double digits off severe lows from last week.

Bankruptcy week and ongoing fund outflows from MLP-focused open-end funds and ETFs.  Absent further violent disruptions in valuations, expect the fund outflow trend to continue as it has over the last few years, as the defunding of MLPs continues.

There’s A Party in the Market, Everyone’s Invited, Except MLPs

There was a time when I didn’t know every pop culture quote from every obscure movie or TV show from the 1980s and 1990s.  In fact, just this week, I had a stunning realization that explained a joke at my expense that was made at my lunch table in 4th grade at Hunters Creek Elementary, some 29 years ago.

At the lunch table, I sat with several boys.  One of them had a bag of Cheetos.  I didn’t have any Cheetos myself and made it clear that I wanted some.  This (wildly popular) boy decided it would be fun to share with others instead of me, while proclaiming, “It’s like there’s a party in my mouth and everyone’s invited, except Hinds!”

Fast forward to this week in 2020.  I am lifting weights in the garage early in the morning (probably subconsciously tapping into the pain of that 4th grade lunch as motivation) while my 9-year old binge watches the Simpsons in the same room.  Over the course of a few days he watches 2 episodes (Flaming Moe’s” and “Homer at the Bat”) where the same phrase is uttered: “It’s like there’s a party in my mouth and everyone’s invited”. 

The first time is when Moe first tries the “Flaming Homer” purple drink. 

The second time is when Ken Griffey, Jr. tries the tonic (also purple) that Mr. Burns insists his players take.

I was Today Years Old When I Learned…

For all these years, I had thought this popular kid had spontaneously come up with that magical line to make a joke at my expense.  Today, I realized he was parroting that line from one of those Simpsons episodes that aired in 1991-1992. 

The performance of MLPs this week relative to all the positivity in the stock market reminded me of this incident and this line.  There was a party in the market this week, and everyone was invited, except MLPs. 

Have a great long weekend everyone.  With any luck, the many parties around the country this weekend will not invite further spikes in COVID cases in a few weeks.

Status Update: MLPs Give Some Back in June

June ended strong Tuesday with indexes both gaining more than 2% with ramping prices into the close of trading for the day, month and quarter.  Even with that strong finish, June was rough for midstream, but AMZ was worse than AMNA.  AMZ saw negative 7.9% total return, the worst June on record, but not bad enough to crack the top 10 worst months ever.   AMZ had posted the best two consecutive months ever off the bottom, so a pullback isn’t surprising.

2Q 2020 was the best quarter ever for the AMZ at +47.6% (next best quarter was 1Q 2013 at +19.7%).  Given 1Q 2020 was the worst quarter ever (-57.2%), the overall YTD performance is still quite negative at -35.7%.

First half 2020 was the worst 1st half ever for the midstream space.  Looking ahead, 2nd half returns have been negative for MLPs in 4 of last 5 years, average return -9.4%.  The best 2H ever was 2009 at +33%, but the last double digit positive 2H was 2010.  Weak returns in recent years have led to heavy tax-loss selling late in the year.

As far as second half returns in recent election years for AMZ, results have also been quite mixed:

  • 2016: +3.1%
  • 2012: +5.2%
  • 2008: -34.0%
  • 2004: +21.7%
  • 2000: +23.9%

AMNA Status Update: Lower Volatility Returns

June wasn’t as bad for the broader midstream index as it was for AMZ, with total return just negative 4.3%.  2Q 2020 was the best quarter ever for the AMNA at +32.4% (next best quarter was 1Q 2019 at +22.2%).  Given 1Q 2020 was the worst quarter ever (-46.9%), the overall YTD performance is still quite negative at -29.7%.

Winners & Losers

MLPs

MLPs underperformed this week overall, but performance by stock was mixed.  Oil pipeline operators MMP and PAA had strong weeks, while gathering & processing MLPs CEQP and DCP were the worst performers.  CEQP seemed to be the name most negatively impacted by the news of the Chesapeake Energy bankruptcy filing, but ET has some exposure and lagged as well. 

EVA repeated in the top 5 week-over-week.  ARLP went from the top 5 last week to bottom 5 this week.  On the YTD leaderboard, EVA is positive for the year so far and the pair of SRLP and EVA are way ahead of the group.  No changes among the biggest YTD losers other than ARLP taking the bottom spot from NBLX.

Midstream Corporations

In contrast to the MLPs, every single 1099-issuing midstream company traded up this week.  LNG was the biggest winner, with several other natural gas-focused players like AM, TRGP, KMI trading up as well.  No news this week, but clearly money was in motion moving into corporations from MLPs this week.

LNG and KMI repeated near the top of the group week over week.  AM went from worst last week to close to first this week.  TRGP also had a nice bounce back.  On the YTD leaderboard, WMB remains in the lead, but LNG, AM and HESM are all closing in on WMB at -20% or better total return YTD.

Canadian Midstream

Note that I cut off Canadian stock performance on Thursday afternoon along with U.S. market, so these charts don’t reflect Friday’s action in the Canadian stock market. 

Through Thursday, performance in Canada was tightly bunched.  More volatile names KEY, IPL and PPL were out front, and defensive plays ENB and Gibson lagged a bit.  There was some regulatory news that broke late Thursday that was supportive of the Trans Mountain Pipeline expansion project and more upstream focused Canadian midstream names.  Also, ENB Line 5 news was supportive of re-starting that pipeline.  But no other company-specific news this week.

IPL continued its recent run of relative strength vs. the group this week, but YTD it remains well behind the group.  TRP remains in the lead YTD, followed closely by ENB.

News of the (Midstream) World

Capital Markets

  • None.

M&A / Growth Projects

  • Energy Transfer (ET) reportedly invoked force majeure to ensure customer contracts remain intact for DAPL expansion (Reuters)

Other

  • Enbridge (ENB-CA) announced partial resumption of service on Line 5 dual pipelines (press release)
  • Altus Midstream (ALTM) announced one-for-twenty reverse stock split, effective June 30th (press release)