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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Checks Out

Stocks, oil prices and natural gas prices were all up this week, but midstream stocks took a step back and appear to be coasting to the finish line for the year after the rush to re-position over the last few months. With just 8 trading days left, there is still time for things to change, but it feels like the big portfolio moves have been made.  Global infrastructure and utilities lagged the S&P 500, but both were basically flat on the week. 

Oil prices notched a 7th consecutive week of gains and are trading at levels not seen since February, helped by general risk-on enthusiasm and by inventory draws from U.S. inventory and floating storage.  The rig count was up in the U.S. this week, but oil prices can’t be stopped right now. 

Natural gas was up a bit this week, probably helped by the winter storm that coated the streets of my neighborhood with a foot of snow.  LNG prices are gaining attention in the press lately after bouncing back this month to multi-year highs for January (around $8) and February (around $11), which represents a strong margin vs. U.S. natural gas prices.

Down This Week, But Still Way Up

Even after the pause in performance the last few weeks, AMNA and AMZ are both trending for their 3rd straight positive month and are both up huge (AMNA +26%, AMZ +36%) from the late October bottom.  After a bigly move like that, it makes sense for things to cool off.  If oil prices and the vaccine and stimulus hopes keep risk appetite up, midstream should resume the upward trajectory.  But risk is always lurking, and the market may respond negatively if the Georgia election run-offs go to the Democrat candidates and regulatory concerns re-emerge.

2020 has been a long year for everyone, we’re all running on fumes.  As I wrote earlier this year, my family and I have run through nearly all of the popular family sitcoms this year, but the Simpsons is one series that just keeps going.  It is the longest running sitcom in history, at 32 seasons and almost 700 episodes. 

This week, we watched the one where Homer is at a picnic and in a race jumps way out in front of the group of kids he’s racing, before tiring out and collapsing right before the finish line.  Later in the episode he trains with Rainer Wolfcastle, gets into shape and becomes addicted to Powersauce protein bars that pack a bushel of apples into every bar, and tries to climb “the Murderhorn” mountain.  Pretty good episode, definitely in my top 100.

I can relate to the struggle to reach the finish line for the year.  But the holiday break is just around the corner, when I can look forward to spending even more time at home with my family.  Midstream just got started a little early and took the last few weeks off.

Winners & Losers

MLPs

Refinery-sponsored MLPs PBFX, PSXP and SHLX were the weaker performers this week.  Refined products demand has been slow to recover and outlook for traditional transportation fuels remains cloudy long-term, which continues to weigh on those names.  PAA was a bit more resilient this week, but non-traditional, small cap names WLKP and CAPL were the best performers.

CEQP repeated in the top 5 week over week.  OMP went from top 5 to near the bottom.  On the YTD leaderboard, SRLP and EVA are sustaining +30% total returns even with the pullback.  In the bottom 5, PSXP replaced PAA.  

Midstream Corporations

There were mostly negative performers among midstream corporations this week, aside from a few small-cap winners with more upstream-oriented businesses like ENLC and ALTM, although they were both down big last week.  ENLC raised $500mm in debt, which may have helped this week.  Bucking that trend was TRGP, which was the worst performer in the group.  ETRN announced guidance that differed from consensus expectations, largely due to timing of MVP, so the stock didn’t get hit too hard on the announcement.

ENLC went from worst to first week over week.  ALTM and PAGP bounced back too.  TRGP, OKE, and LNG were in the top 5 last week and lagged this week.  On the YTD leaderboard, AM is the only positive stock once again after most of the group took a step back.

Canadian Midstream

Every midstream corporation in Canada was down this week, with a wider than normal dispersion of returns for such a quiet week of news, outside of 2021 guidance from Pembina Monday.  That guidance clearly was not well-received, despite coming in slightly above sell-side expectations at the mid-point. 

Week to week, GEI bounced back, but TRP did not.  ENB continued to outperform, as it has since the press releases on Line 3 permitting started to roll in month or so ago.  On the YTD leaderboard, ENB is still on top, but GEI is back ahead of TRP, which has suffered as investors have rotated into ENB.  TRP announced a revised (higher) bid for subsidiary TCP, which probably didn’t help. Pembina also dropped a spot and is now behind Keyera YTD.

News of the (Midstream) World

 

Capital Markets

  • EnLink Midstream (ENLC) announced pricing of $500mm of 5.625% senior notes due 2028 (press release)

Growth Projects / M&A

  • TC Energy (TRP-CA) announced definitive agreement for buy-in of TCP, which included a sweetened exchange ratio of 0.7x, +7.7% from original 0.65x offer (press release)
    • Transaction subject to approval of majority of TCP common units and is expected to close in 1H 2021
  • Global Partners (GLP) announced acquisition of retail fuel and convenience store assets in Connecticut and New York, including 27 company-operated locations plus fuel supply agreements for 25 other gas stations (press release)
  • Green Plains Partners (GPP) announced $10mm sale of ethanol storage and transportation assets in Hereford, TX to Green Plains Hereford LLC (press release)