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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Flattish, Finishes on Positive Note

Midstream was almost positive week over week, but had to settle for two days of positive performance in a row.  The MLP Index nearly recovered from Monday’s 2.2% decline, its worst day since mid-August, with a 2.2% gain Thursday, its best day since late August. MLPs have now been negative for a record 9 straight weeks.

Commodity prices held up, NGL prices continue to show signs of recovery, but energy stocks broadly are still struggling to go green.  Thanksgiving week incoming.  Just for fun, I put some return numbers for the Friday after Thanksgiving and the week of Thanksgiving into the table below. 

The week has been memorable on a few occasions. The second best week ever for MLPs happened in 2008 after a 21% decline the week prior.  Then, 5 years ago, the big OPEC meeting that crushed oil prices and MLPs. 

It has also been 5 straight years of negative performance the day after Thanksgiving, and last year was a down 3% week.

Polling with the Homies

Nine weeks in a row is my limit for trying to explain negative MLP stock price action.  MLPs are oversold, but that doesn’t mean they can’t be sold further.  So, rather than try again this week, I’d like your opinion on a few topics to help us sort through where we are.

What is your general view of midstream valuation?

Attractive

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Not Attractive

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Hard to generalize, given wide range of quality and valuations

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General view of midstream fundamentals?

Good

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Good enough

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Not good

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Basin dependent

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Biggest risk to midstream outlook?

Slowing production

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Political & regulatory headwinds

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Competition

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Poor capital allocation

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Commodity prices

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Most compelling reason to buy midstream stocks?

Valuation

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Ramping free cash flow

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Commodity price outlook

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Mean reversion

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Winners & Losers

MLPs

HMLP led all MLPs in performance this week after its very late 3Q earnings report Thursday helped the stock.  CAPL’s founder bought back the GP this week, and its small investor base responded well.   ET bounced back, helped by the quarterly re-investment of some of the CEO’s distributions.  In the bottom 5, SMLP and EQM continue to struggle as the down-rating of problem G&P MLPs continues.

The rare triple repeat in the bottom 5 week over week: GLOP, CCR and SMLP.  That kind of selling after the quarterly distribution and before year-end smacks of tax-loss selling.  CAPL repeated in the top 5.  On the YTD leaderboard, CAPL is now the best performing name, overtaking NS and USAC this week.

Midstream Corporations

WMB was the best performing U.S. midstream corporation this week.  PAGP also caught a bid late in the week.  OKE was once again among the winners.  Tax loss selling appears to be a factor in the bottom 5, which included 4 of the same names we’ve seen repeatedly near the bottom this month and all year (AM, ENLC, ETRN, ALTM).

OKE broke above 40% YTD return (again) and sits atop the leaderboard ahead of KMI.   On the downside, fresh lows were hit this week for ALTM, AM, ENLC and ETRN.  Still no word on the offer made by Blackstone for TGE a few months back.

Canadian Midstream

Canada under-performed the U.S. midstream stocks this week.  Oil prices in Canada were down and the spread between Canadian and U.S. oil widened to nearly $20/bbl.  IPL led the group as the only positive name.  TRP’s analyst day was catalyst light, but the stock held up okay relative to the group.

GEI’s strong run the last few weeks paused this week with the worst performance among Canadian stocks.  On the YTD leaderboard, TRP remains on top, and every stock except KML has produced 25%+ returns in U.S. dollar terms this year.

News of the (Midstream) World

News items this week largely only for those true MLP nerds, with the G.P of a small MLP quietly being bought back by its founder and another obscure MLP with a big debt offering.  Most impactful news this week: insider purchases, and hopefully more executives make similar buys in coming weeks, especially those who complain about their stock prices.

Capital Markets

  • Enviva Partners (EVA) announced pricing of upsized offering of $550mm of 6.5% senior notes due 2026 at par (press release)

Growth Projects / M&A 

  • CrossAmerica Partners (CAPL) announced that entities controlled by Joe Topper, CAPL’s founder, acquired the general partner and 7.5mm CAPL units from sponsor Alimentation Couche Tard Inc. (press release)
    • In July 2017, Couche-Tard acquired the GP as part of its acquisition of CST Brands, Inc.
    • In 2014, Joe Topper had sold the general partner and his interests in the MLP to CST Brands, Inc. (press release)
    • Originally called Lehigh Gas Partners, maybe management will bring that name back
  • Royal Vopak (Netherland public company) announced it has been selected by Gulf Coast Growth Ventures to build, own and operate a new industrial terminal on the U.S. Gulf Coast at Corpus Christ (press release)
  • Two LNG projects received FERC approval this week, including:
  • DCP Midstream (DCP) announced the sale of its Rock Creek Asset for an undisclosed price (press release)
  • Tallgrass Energy (TGE) announced binding open season for expansion on Pony Express Pipeline (press release)
  • NuStar Energy (NS) announced binding open season for expansion on its Midland Trunkline within its Permian Crude System (press release)

Other

  • Notable insider purchases this week (coinciding with distribution payments), including:
    • Energy Transfer (ET) CEO, Kelcy Warren, purchased $45mm worth of stock (filing)
    • Cheniere Energy (LNG) CEO, Jack Fusco, purchased $500k worth of stock (filing)
    • Plains GP (PAGP) Chairman Greg Armstrong and CEO, Willie Chiang, each purchased $1mm worth stock (filing)