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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Market Relief, MLP Grief

The market found some relief on the stimulus bill, but midstream and MLPs lagged this week.  Canada midstream helped the AMNA outperform the other midstream indexes.  Oil prices fell further, and the lack of places to put oil in this climate is concerning. 

REITs and Utilities rebounded with the market, then acted more defensively Friday when the market and interest rates dropped.  Midstream gave up most of its mid-week rebound Friday, but it was still the 10th best week ever for AMNA at 4.9%.

Distribution Announcements

  • Several more distribution cuts were announced this week, including ENLC, DCP, GEL, and NBLX which brings the total 1Q distribution / dividend cuts to 7 if you count ETRN/EQM as a single cut
  • The NBLX cut came just a quarter after the IDRs were eliminated, another example of an IDR takeout multiple that skews much higher in retrospect
  • Expect further distribution cuts as midstream operators grapple with their elevated leverage amid the challenging macro backdrop

Updated Records – Worst. Month. Ever.

There hasn’t been much midstream-specific news aside from pulling back on spending and distributions.  I have no particularly insightful takes on just how long U.S. production and pipeline volumes can hold out before shut-ins start happening.  What I can offer is an updated look at the magnitude of the sell-off we have seen so far this year and month. 

There are only two more trading days left this month and this quarter, both of which will be the worst ever for midstream and MLPs, by a wide margin.  Indexes are down 50-60%, worst quarter before this was -22% for AMZ and 25% for AMNA, both in 3Q 2015. 

We added another top 10 worst day of the year to the list for both AMZ and AMNA on Monday, and AMNA added another one on Friday. 

With this volatility has come a few up days as well, including 3 in the top 10 and another addition for AMNA this week on Tuesday.  AMZ didn’t keep up with AMNA on that day or on this week overall.

Deus Ex Machina

This week, the government eventually announced a stimulus package that was good enough to stop the precipitous market decline we’ve seen as the world deals with the global pandemic situation.  While that was happening, I was also engaged in some serious home schooling and parenting this week. 

In the throes of the chaos, I showed my children the film Space Jam.  Late in that film, it seems like all hope is lost for the Looney Toon (and Michael Jordan), because they are down to just 4 players.  But, out of nowhere, Bill Murray appears to join the squad and makes a critical pass that led to the eventual winning basket.

Bill Murray was one of the most blatant instances of Deus Ex Machina that I can remember in film.  The market needed and got some much-needed assistance this week.  Although the effects seemed to wear off a bit by Friday…

Oil prices could sure use some assistance, but as prices reflect, there appears to be little hope of a Deus Ex Machina for oil prices.  Unless Saudi Arabia or Russia come back to the table.

Winners & Losers

MLPs

Every single one of the winners this week was outside of the Alerian MLP Index and 4 were marine transport MLPs.  The biggest losers included two MLPs that cut distributions this week, GEL and NBLX.  WES was the biggest loser and currently yields more than 70%, so the market is pricing in a very large distribution cut, which may happen in the coming weeks.

HMLP went from bottom 5 last week to top 5 this week.  NGL went from top 5 last week to bottom 5 this week.  On the YTD leaderboard, SRLP remains in the lead and the bid it received from its sponsor should help it hold its value.  Every one of the bottom 5 are down more than 80% YTD. 

Midstream Corporations

Within midstream corporations, Williams held a conference call mid-week to stress the stability of its business, the focus on demand-pull natural gas assets, and affirmed they expect to be able to hit the low end of EBITDA guidance for 2020.  The stock reacted positively to those messages this week. 

The market’s confidence in the Blackstone takeout deal being consummated seemed to be higher this week than last week.  KMI and OKE were also positive performers, although OKE gave up most of its weekly gains on Friday.  ENLC’s distribution cut wasn’t met with much enthusiasm by the market, as it was among the losers this week.

KMI and TGE repeated in the top 5, WMB and OKE went from bottom 5 to top 5 week over week.  On the YTD leaderboard, TGE is the winner, supported by its agreement to be sold for cash to Blackstone.  KMI and WMB are the only other names better than -40% this year.  OKE is down more than 70% even after a slight rebound this week.

Canadian Midstream

TRP with the big win this week in Canadian midstream, followed by some names that bounced back hard early in the week, but sold off Friday to leave the top spot to TRP.  Almost the entire group was positive, Keyera being the exception after falling 15% Friday.

On the YTD leaderboard in Canada, things don’t look quite as bad as in the U.S., with two names better than -30% in USD terms this year, and with the worst names better than -70%.

 

News of the (Midstream) World

This week there were more distribution cuts, more capex cuts, and our first take private offer of this downturn.

Capital Markets

  • None.

Growth Projects / M&A

  • Sprague Resources (SRLP) announced receipt of proposal from its sponsor to acquire all of its outstanding common units for $13.00/unit (press release)
    • Price represents a 14% premium to 10-day volume weighted average price, but a 0% premium to the prior day’s closing price
    • Sprague Resources Holdings owns 53.3% of outstanding common units and the general partner of SRLP
  • DCP Midstream (DCP) lowered growth capital expenditure plans for 2020 by 75%, offered no EBITDA guidance update at this point
    • Others (AM, SUN, PSXP) also reduced capital budget plans this week

Other

  • The U.S. District Court of Appeals for D.C. ruled that the Army Corp of Engineers’ latest study did not fully address the impact of the Dakota Access Pipeline (DAPL) on the Standing Rock Sioux Tribe (Bloomberg Environment)