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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Earnings Hit, Stocks Miss

Midstream and MLPs were slight underperformers among energy stocks (XOP and XLE were largely flat) and underperformed general equities (as measured by S&P 500), which rallied 1.5%.  Earnings, ex-dates for distributions and month-end strangeness whipped things around a bit in between a basically flat week. Front month natural gas and spot NGL prices were very strong on colder temperatures.  The back end of the curve didn’t move, but a rally in any area of the curve is appreciated by weary midstream investors.

The week felt worse than it ended up being, which is typical of distributon ex-date season.  I run through a few bullets from each day of the week to recap how we ended up being close to flat in midstream despite 4 straight negative days to open the week.

  • Monday: EPD reported, raised long-term capital plan by $3bn, underperformed group from the start, then group traded off to join EPD
    • AMZ (-1.2%) and AMNA (-1.0%) both down
  • Tuesday: Natural gas prices popped, CEQP notable outperformer on capex reduction, CNXM outperformed on earnings
    • AMZ and AMNA both down marginally on the day
  • Wednesday: Positive producer earnings (AR, HES notable), OKE trades poorly after reporting in-line results, AM notable in capex reduction and trades way up (short squeeze), then finishes down
    • AMZ (+0.1%) barely positive, AMNA (-0.4%) down
  • Thursday: WMB, MMP and MPLX results reported, MPLX traded well, WMB and MMP traded poorly, AM weak again after distribution ex-date
    • No specific details on rate case from WMB, bad conference call messaging
    • Special committee formed for MPLX
    • Another washout in sentiment after distribution payments combined with month-end selling
    • AMZ (-0.1%) and AMNA (-0.3%) both down
  • Friday: broad market risk-on action on jobs report, oil ripped higher, midstream came along for the ride with broad-based rally, ET and PAA notable outperformers
    • LNG 2020 guidance and commentary were positive, TRP results well received, no update on SHLX IDR situation, trades up anyway
    • AMZ (+1.0%) and AMNA (+1.4%) both positive

The market remains disinterested in midstream overall, but earnings weren’t bad this week.  While we did not get resolution on the many strategic uncertainties within the sector this week, that may change next week, with the following companies set to report: ENB, PAA, ET, EQM, WES, NS, GEL, ENBL, TRGP, NBLX, ENLC, DCP.

Ok, Boomer

The reaction to certain earnings announcements this week was frustrating.  It reminded me of a brief scene from the beginning of the 1994 action film “True Lies”.  After the cold open scene where super agent Harry Tasker (Arnold Schwarzenegger) shoots his way out of an exotic party through the snow, he returns to his mundane suburban life.  Back at home, he delivers his daughter Dana a snow globe from his “business trip”.  She’s like, “Gee, thanks Dad.” But right after he leaves, she says “Lame” and tosses it in the trash.

This week, each of EPD, OKE and WMB reported results on different days.  Each management team was probably expecting the results to be well-received.  In each case, the market took what might have been received well in some other MLP era and was basically like Dana Tasker with the snow globe: “Lame”. 

EPD’s case was seen as a negative reaction to fresh project announcements in a time of pending overbuilding.  EPD management said they are happy to pick up the slack where others have held back, seeing the (forced?) capital discipline of others as an rare opportunity to gain market share.  In the long-run, EPD may end up with a stronger business, but at a cost (this week at least) of a weaker share price.

The True Lies analogy is basically the exact same concept as the popular meme from Its Always Sunny in Philadelphia involving cereal bowl tossing (see below).  Except in the True Lies version, there is the lame dad aspect to it that matches how certain midstream management teams may have worn out their welcome with even the most dedicated midstream investors.  In other words, the market hears results and outlook and responds with disdain: “Ok, Boomer”.

Status Update – Another Scary October in the Books

October return for MLP Index was more than 4% negative for a 4th year in a row, now 5 of the last 6 years have had worse than 4% declines in October.

Over the longer term, November has the worst average return for the MLP Index for the 23 years and the worst hit rate (13 negative in 23 years).  But in 4 of the last 5 years, November has provided a break from a miserable October and done better.  Last year, the MLP Index was negative but close to flat in November sandwiched by two 8%+ declining months in one of the three worst quarters for MLPs of all time.  Given how bad this October was, there may be some reason to hope for a break from selling in November.

AMNA Status Update – Fall Back

AMNA fared better this October, but also continued the streak of 4 straight years of negative October returns. 

AMNA has outpaced the AMZ for 5 straight quarters and is off to a big lead to open the 4th quarter.  That skew is likely due to combination of: (1) technical issues we discussed last week, (2) the preference for corporations from 1099 and governance perspective, and (3) fundamental stability of the natural gas pipeline assets that are predominantly found within midstream corporations today.  Those factors appear to be overwhelming the small population of individual investors who believe in the high yields offered by MLPs currently.

Winners & Losers

CNXM reported results this week and clearly the results were either better than expectations, or they woke up some market participants to unrealized value.  TCP announced a new gas pipeline project and its sponsor announced a Canadian pipeline upstream of its portion, but most of its outperformance came earlier in the week as gas prices strengthened.  On the downside, the few remaining operating coal MLPs were hammered this week.

CNXM repeated in the top 5 this week, EQM repeated in the bottom 5.  PAA took a break from the bottom 5 this week and reports earnings next week.  On the YTD leaderboard, CAPL replaced TGP in top 5, ARLP replaced ENBL in the bottom 5.

Midstream Corporations

Median U.S. corporations underperformed the MLP Index this week, but there were a few positive stocks. TGE was among the leaders.  TGE seemed to trade better on the expectation that the Blackstone bid would not be walked back, but the situation remains fluid.  Most of the laggards were on the smaller end of the market cap scale, including G&P names like AM, ALTM and ETRN tied to uncertain upstream partners.  On its earnings call, EQT appeared eager to reduce its stake in ETRN over time to reduce debt, which may have weighed on the shares.

ETRN repeated in the bottom 5, KMI repeated in the top 5.  PAGP avoided the bottom 5 after a few weeks among the biggest losers.  On the YTD leaderboard, KMI hopped over OKE for the overall lead, WMB traded down, but is clinging to its position in the top 5.  In the bottom 5, no material changes among the group.

Canadian Midstream

Canada outperformed this week, benefitting from a positive Line 5 ruling late in the week.  Pembina reported in-line results Friday, but it was the worst performer on the week as the KML merger remains pending, along with the KMI overhang that comes with it.

On the YTD leaderboard, Pembina’s is now behind ENB near the bottom of the list.  All the major surviving names in Canada have greater than 20%+ returns so far this year.

News of the (Midstream) World

Some incremental new projects and spending announced this week, which in some cases spooked the market on fears of ongoing capex creep and overbuilding (both likely).  Two more formal announcements of special situation strategic review processes (MPLX and MIC) to add to the already long list of formal (NBLX, SHLX, WES, OMP, TGE) and informal (ALTM, ENLC, AM, EQM, etc.) that remain ongoing with uncertain outcomes.

Capital Markets

  • None.

Growth Projects / M&A

  • Seaway Crude Pipeline, a 50/50 JV between Enterprise Products (EPD) and Enbridge (ENB-CA), announced an open season for a 200,000 bpd expansion of light crude capacity (press release)
    • Initial capacity could be available by mid-2020, with the expansion fully in-service in 2022
  • MPLX announced formation of special committee to further evaluate strategic alternatives (press release)
    • This announcement was in conjunction with several announcements by MPC, including a spinoff of the retail business of MPC (Speedway)
  • TC Energy (TRP) announced $1.2bn West Path Delivery Program, an expansion of its NOVA Gas Transmission and Foothills Systems, which will connect with the GTN Xpress Project (see below) to deliver volumes to downstream markets (press release)
    • Expected to be fully in-service by 2023
    • Under-pinned by new firm service contracts with terms that exceed 30 years
  • TC Pipelines (TCP) announced FID on its GTN Xpress project that is expected to cost $335mm and provide 250,000 Dth/d of firm transportation service for natural gas from Idaho to Oregon (press release)
    • Expected to be in-service by November 2023
    • Under-pinned by 30 years contracts with negotiated rates
  • Macquarie Infrastructure Company (MIC) announced intention to actively pursue strategic alternatives, including the sale of the company or its operating businesses (press release)
    • No timetable has been set for the strategic actions
    • MIC owns certain Gulf Coast and East Coast terminal assets that might be of interest to midstream operators

Other

  • MPLX announced Mike Hennigan to assume role of CEO at MPLX with retirement of Gary Heminger from both MPLX and MPC (press release)

Distribution / Dividend Announcements

  • 9 Distribution announcements that I counted this week.