What a week. The oil price collapse dragged MLPs and midstream stocks down again this week. The group finished down a staggering 30%, which leaves YTD returns in less than 3 months at negative 40-50%. The S&P 500 broke a few records and entered into bear market territory officially, which didn’t help midstream.
Pain was everywhere, as investors sought liquidity where available, in a rush to the exits as we all prepare to shelter in place for a few weeks after a stunning round of postponements, suspensions and cancelations across America this week, for the greater good.
The market’s cancellation of MLPs and MLP products this week was no less stunning, but like some of what’s known as “cancel culture”, it felt extreme. Midstream is more oversold than it has ever been, in desperate need of hope, maybe even a pep talk.
In the 2013 film Pacific Rim that made more than $400mm at the box office, the world was threatened by giant monsters called Kaiju that would emerge from cracks in the ocean floor. Countries from around the world banded together to create giant robots to fight the Kaiju and trained “pilots” to operate the giant robots. At the end of the film, Idris Elba’s character Marshal Stacker Pentecost gave a rousing speech that ended with the line, “Today, we are canceling the apocalypse!”
It remains to be seen what will save the midstream space from its worst single year return ever, but there will be survivors of this latest challenge to the existence of midstream companies. The show must go on. Having invested through a few cycles (including 2008), this time around the companies are in better financial shape than in the past (no IDRs, lower payout ratios), but with very daunting technical, political and fundamental headwinds that continue to relentlessly frustrate investors.
Rewriting the Record Book
Later this week, we’ll post an update to the universe with some further thoughts on the technical challenges of the sector. Before I share some summary thoughts on why this week’s action was so bad and what to expect from midstream in the future, I wanted to catalogue the record-breaking volatility this week.
Frequent Questions This Week
Below I’ll share some of the more frequent questions I received this week, along with some quick thoughts on each.
Why has the selloff been so large and so quick?
Why are MLPs so correlated to oil prices when they have little direct commodity price exposure?
Can you breakout what part of the sell-off was from oil prices vs. equity markets vs. company specific issues?
If oil prices remain low at $30-35 for the next 2-3 years, what is the impact on MLP fundamentals?
What are the key factors that would lead to cuts in dividends?
The least bad name in the MLP space was SRLP, which was only down 9% Monday and recovered the rest of the week, benefitting from being under owned by MLP fund products and ETFs. Other relative winners included SMLP, which rallied 91% Friday after dropping 30% on both Monday and Thursday. The losers this week were each down more than 50%. The worst three were G&P names likely to be impacted by reduced oil-directed drilling in the Permian & DJ (NBLX) and Bakken (CEQP and OMP). PBFX (downstream-oriented subsidiary of a refinery operator) was a bit confusing to land among the bottom 5, but it has a small float and was likely crushed on a forced sell down from a larger investor.
SRLP, TCP and CINR repeated in the top 5 week-over-week. NBLX repeated in the bottom 5. SMLP went from bottom 5 to top 5. On the YTD leaderboard, each of the top 5 best performers is down 15% or more, and each of the bottom 5 are down 70%, including DCP and CEQP, fresh names on the bottom 5.
Median return among U.S. corporations was -24%, better than the AMNA and AMZ, which was weighed down by weakness among large cap names like OKE and EPD. WMB was the big relative winner among midstream corporations this week. Lower oil prices likely mean better outlook for natural gas supply and demand, to the benefit of northeast producers and WMB’s pipelines. Other natural gas names ETRN and LNG were also strong performers.
Among the bottom 5, TRGP and ENLC aren’t a surprise to see. OKE was the outlier after outperforming and executing at a high level through the 5-year downturn, only to be sold hard on oil prices that make the Bakken challenged long term.
RTLR, ENLC and TRGP repeated in the bottom 5 this week. On the YTD leaderboard, TGE leads the group, but appears to be pricing in some uncertainty as to whether its buyout will close. Each of the top 5 is down more than 25% this year. WMB climbed into the top 5, replacing OKE.
Canadian midstream was not quite as stable as usual this week. As you’d expect, the largest names held up best, with ENB and TRP outperforming by a wide margin the rest of the group. Pembina down more than 40% in a week has to be a shock to its investor base and those who favor their team’s generally conservative management of the business.
ENB and TRP repeated as the top performers week over week. IPL and KEY were the bottom 2 performers this week. On the YTD leaderboard, those two sets are at the top and bottom as well.
Very little news this week, and minimal communication in general from midstream companies in general. It wasn’t until Wednesday that OKE and NBLX announced reduced capex plans for 2020.
Growth Projects / M&A