On the week of America’s birthday, U.S. midstream (MLPs and corporations) outperformed Canadian ones, and the overall sector kept pace with a positive week for the S&P 500 and utilities. The AMNA crested 25% total return for 2019 so far and is off to a good start for the back half of the year.
Natural gas prices rallied late in the week to finish up 5%, showing signs of life after plunging to fresh depths the last few months. Things were quiet in midstream this week, but in less than 2 weeks we get another round of earnings, and we’ll have a clearer picture as to producer activity and volume trends from here.
MLPs Camped Out
I’m in the rural Texas Hill Country this weekend dropping my kids off to summer camp for a month. I went to camp for 8 years in this same town. My mom went to camp here starting in the 1960s. My sister lives year-round at that same summer camp which she helps manage after attending herself for more than a decade. We are a camp family, and the tiny town with all these camps is a very comfortable place for me. Each year I return, so does the strong nostalgia vibe.
MLP investors can be quite nostalgic, too. There was a time, right about when I stopped going to summer camp in the mid-1990s, when MLPs were exclusively yield vehicles. MLPs gained a strong following because they offered dependable, and later growing sources of income. Their yields were reliable enough to be compared with other interest-bearing securities, including the rate on 10-year U.S. treasuries.
Yields haven’t been a good valuation tool for midstream stocks for a while now, and we’ve said as much on this blog. We’ve even gone so far as to call the yield on the AMZ fake yield, and at times it has been for months after a backdoor distribution cut was announced, but before the deal closed. For reference, the AMZ current yield is 7.88% and for the AMNA its 6.16%.
But let’s just pretend yields were still of paramount importance to midstream stocks…If that were the case, the current yield spreads would be eye popping. Maybe you haven’t noticed, but yields across the sector are stubbornly high, even as the risk-free rate in this country has been dropping like a lead balloon. This has created an unusually wide yield spread.
As shown above, the spread hasn’t been this high in the normal course of Midstream trading, outside of events like the global financial crisis in 2008 or the oil collapse of 2014. Distributions have stabilized, but MLP yields haven’t adjusted down with the rest of the market. As such, MLPs stock prices continue to camp out around the 250 area. The chart below zooms in on the last 5 years.
In July 2007, the yield spread for MLPs relative to US 10 year got to their lowest point at 26 bps. The chart below offers more detailed stats on yield spreads.
High yield spreads have become more glaring as dividends have stabilized. But does that really make much difference if yield doesn’t work as a valuation tool?
Winners & Losers
No news among the winners and losers in the MLP space this week. EQM traded off and saw no positive readthrough from the healthy multiple paid by UGI to acquire Northeast gathering & processing assets from TRP this week.
TOO repeated in the top 5 on no news. CINR went from first last week to worst this week. On the YTD leaderboard, each of the top 5 best performing MLPs has produced 45%+ so far this year. CINR dropped into the bottom 5 this week.
ENLC repeated at the top of the group for a second straight week, while ALTM and ETRN repeated at the bottom of the group. KMI underperformed for a second straight week. On the YTD leaderboard, the top 5 remained intact, and PAGP joined the 30% return club at the top.
Inter Pipeline was far and away the best performer in Canada this week on no news. IPL has exposure to NGL prices in Mt Belvieu that were positive this week. TRP’s large asset sale Monday didn’t end up having much impact on TRP after a sell-off Friday negated the week’s gains.
In small cap Canadian midstream stocks that aren’t well-followed, IPL repeated near the top of the group while GEI underperformed for a second week. IPL’s big week puts its YTD returns at 20%+, making every name in the group 20%+ in USD terms for the year.
News of the (Midstream) World
TRP had the biggest announcement this week, as it appears they were hard at work through Canada Day (Monday) on a major asset sale at an attractive multiple. NGL Energy finalized the complicated financing of their latest water acquisition. But other than that, it was a quiet week across the midstream world.
Growth Projects / M&A