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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Flattens Friday

Midstream and MLPs looked to be coasting to a third straight week of solid gains, but a sharp selloff across energy stocks Friday erased the gains for the week.  There was little volatility in the market generally this week.  In the summary dashboard below, only natural gas prices moved more than 1% vs. last week.  In the absence of material catalysts, the market is in a holding pattern ahead of the election.

Earnings season for midstream kicks off this week with KMI on Wednesday.  Expect earnings to bring some catalysts for individual stocks, including opportunities for management teams to discuss fundamental outlooks, free cash flow plans, cost cutting initiatives, and capital allocation.  Even with that opportunity, midstream and the energy market overall has the election and tax loss selling looming in the next few months, so it will be interesting to see how much impact earnings will have.

Fund Flows: Structurally Challenged

There seems to be a pause in the ongoing fund outflows from midstream fund products.  That reprieve in selling pressure, combined with the lack of volatility and news this week afford me a chance to call back to old posts to help explain fund flow dynamics at play in midstream.

Based on Wells Fargo data, in just the last 21 months through 9/30/20, there have been $6.2bn of total net outflows from midstream ETFs and open-end mutual funds, $8.5bn from February 2018.  This is in addition to more than $3bn of institutional outflows from reported mandate terminations.  The overall amount of institutional “money-in-motion” out of midstream is much larger when considering those that do not report publicly.  This money is moving into listed infrastructure, listed real assets, broader equity mandates, and into private equity.

The reasons for the outflows are many, and they’ve been discussed at length here at MLPguy for years now.  To summarize:

  • Small Universe: Shrinking number of companies has reduced the need for a dedicated sector asset manager to choose among the few remaining companies.
    • Combined market capitalization of just $200bn of market capitalization ($335 if you include Canadian midstream), and more than 60% of the market capitalization from 5 stocks
    • With more MLPs becoming corporations, there is less justification for this group of stocks to be its own allocation vs. regular equity allocations
    • Discussed last week, but also in a few earlier posts, including one from March (Elephants Come Home to Roost), and two from 2018 (MLPs and the Elephants in the Room)
  • Poor Performance: lower returns and higher volatility than was expected.
    • Discussed at the close of most months and years lately
  • Income Reduction: 125+ distribution and dividend cuts in 6 years has reduced confidence in the income component of the return that likely a big selling point of the original allocation.
    • Discussed extensively in 2017 when the first rounds of distribution cuts were being whitewashed by other managers and by Alerian (Distribution Checks)
  • ESG Considerations: de-carbonization focus has impacted all energy stocks, but MLPs have an added layer of weak governance and high incidence of “controversy” due to news coverage of efforts to build pipelines.
    • Weak returns also make it easy to move away from midstream and cite ESG reasons.
  • Inefficient Structures: many fund vehicles were structured as corporations specifically to own MLPs

This multi-year unwind is ongoing.  But there are times when the pressure abates, often coinciding with renewed optimism in January or the ramp into third quarter distribution payments in October.  There will eventually be a time when fund outflows run their course, and the unwind is complete.  There will be large opportunities in the surviving midstream players. 

Midstream companies have been challenged by the above dynamic and weak commodity prices, which makes their efforts to change their excessive spending and leverage situations.  The path thus far has been to reduce dividends, reduce costs and reduce capital outlays.  While top line growth will remain challenged, free cash flow visibility is growing.

Winners & Losers


MLPs were very mixed this week, with a few winners up around 3%, including PAA seeing some relief at the top.  NGL had an unfavorable contract ruling that impacted its stock late in the week.  ET was at the top of the group at the start of Friday, but dropped out of the top 5 with a brutal last few hours of trading Friday.

DCP repeated in the top 5 week-over-week.  NGL repeated in the bottom 5.  On the YTD leaderboard, small cap sensations EVA and SRLP continue to separate themselves from the group, in relative obscurity.  PAA swapped places with NGL in the bottom 5.

Midstream Corporations

AM way out in front this week, its dividend yield is 19% even after this move, so probably some seasonal dividend capture trading going on with it.  HESM was upgraded late in the week, which reminded the market of the consistency that HESM has shown and is likely to continue to show.  LNG had a strong week as well, outperforming other larger midstream corporations.  ETRN was an outlier on the downside, especially in contrast to AM.

AM and HESM repeated in the top 5.  TRGP and ENLC retreated a bit from last week’s gains, going from top 5 to bottom 5.  WMB and ETRN repeated near the bottom.  On the YTD leaderboard, AM is now positive including dividends.  HESM climbed into 3rd place ahead of LNG. 

Canadian Midstream

Canadian midstream corporations underperformed MLPs and U.S. corps this week.  Larger names ENB and TRP held up better, with ENB getting a bump Friday from some positive news on the Line 3 Replacement project.

Week over week, not much to glean, other than GEI and TRP trade well in risk-on and risk-off weeks.  On the YTD leaderboard, GEI still out in front, IPL still way behind, ENB still in the middle.

News of the (Midstream) World

Not much transaction news this week.  There were some mixed updates on project permitting and a bankruptcy ruling that was not in the favor of the midstream operator.  In addition, distribution announcements are starting to roll in.  Nothing too exciting as we inch closer to 3Q earnings season.

Capital Markets

  • None.

M&A / Growth Projects

  • An Administrative Law Judge in Minnesota recommended that in the matter of the Draft 401 Certification for the Line 3 Replacement Project that the Minnesota Pollution Control Agency find that the Joint Petitioners “have failed to meet their burden of proof” in their objection to the project
    • In plainer English, this recommendation in favor of the Line 3 Replacement project is a positive development for Enbridge, which owns the pipeline
    • There are still more decisions to come before ENB can start construction, with the next event coming November 14th, when the decision on the 401 permit will be made
    • Construction of the pipeline is expected to take 6-9 months after all permits are received
  • Summit Midstream (SMLP) announced FERC approval of Double E Pipeline (press release)
    • SMLP owns 70% of the pipeline project
    • SMLP announced FID on the pipeline in June 2019, and reported that construction costs are trending 15% below original budget
  • AltaGas (ALA-CA) announced acquisition of an additional 37% interest in Petrogas for $715mm (press release)
    • This transaction brings ALA-CA’s indirect ownership of Petrogas to 74%, with Idemitsu Kosan Co. owning the remaining 26%
  • Late Friday, the Fourth Circuit Court of Appeals put a temporary stay on construction for the Mountain Valley Pipeline being developed by Equitrans (ETRN), another potential setback for ETRN


  • Extraction Oil & Gas, a customer of NGL Energy (NGL) and its Grand Mesa Pipeline wins ruling in bankruptcy court that says covenants do not run with the land
    • This increases the likelihood of renegotiation of contracts and lost EBITDA on the pipeline


  • 6 distribution/dividend announcements this week. So far, no distribution cuts this quarter, which is nice.