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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Furious Finish

Midstream had another huge week on still more follow-through of positive sentiment shift that’s occurred over the last 5 weeks as positive vaccine news sparked a rotation into value and energy stocks. 

No big vaccine news this week.  But just getting through the OPEC meeting may have been catalyst enough as that meeting represented the final known risk event for energy stocks in 2020.  Additionally, ongoing support from the Fed and chatter on potential fiscal stimulus were enough to push the broad market higher, despite a lackluster jobs report Friday.  Utilities were negative this week, not helped by rising interest rates, and they dragged down the infrastructure index, which finished flattish.

The MLP Index outperformed the broader midstream benchmarks by a wide margin this week.  The AMZ is up 41% (including distributions) in just 26 trading days since 10/28.  The Alerian Midstream Energy Index (AMNA) has posted a 30% return since 10/28, and the index is now down less than 20% year to date.  An incredible a comeback from its absolute low point on March 18th, when the index was down 59% for the year.  AMNA has rallied more than 100% off that bottom.

I Was At that Game!

I went to college in Boston, later returned to live there for around 5 years, two of my kids were born there.  When we lived there, I listened to Boston sports radio every day on my commute, we watched every Patriots game and all the postgame press conferences on local TV.  But I only ever went to one game live at Gillette Stadium: the AFC Championship Game plated in January 2012 against the Baltimore Ravens. 

The game ended in dramatic fashion with a defensive back slapping a caught ball out of the hands of a wide receiver who appeared to have caught the game winning touchdown.  That pass breakup was followed by a missed 32-yard field goal (this was before Justin Tucker) with 15 seconds to give the Pats the win.  It was a great game, and emblematic of the luck that seemed to always go the Pats way. 

The thing is, I only stayed for the first half. 

We had seats in the upper deck, temperature was below freezing, and we had a 4.5-year old and 3-year old, so the plan was always to get there early and stay for the first half then leave.  So, it wasn’t the equivalent of leaving a game in the 7th inning and missing a great comeback, but I’ve done that too!  Sometimes you make a call judging the risks of hanging around until the end of the game balanced against the potential for an epic comeback win.

Epic Finish

Reggie Miller’s 8 points in 9 seconds to beat the Knicks in a playoff game gets a lot of hype. But probably the craziest ending to a game ever was Tracy McGrady’s 13 points in 33 seconds to overcome an 8-point deficit against the Spurs with four 3-pointers (one with a free throw too) in 2004 at the Toyota Center, 16 years ago this week (12/9/2004).  If you go watch that clip on YouTube, you can see some of the crowd had already headed for the exit, and they missed an incredible finish (I wasn’t at that game at any point).  

Recent midstream and energy stock performance has a similar feel.  It’s gone from a total blowout, to some nice pride points in “garbage time”, and now to the opposing coach calling for his starters to put their shoes back on and get back in there to fend off the furious comeback.  There are those who were in the crowd to start the game who have long since left the stadium with no plans for re-entry.  Some are making their way back to their seats or even moving to some of the unoccupied seats near the court.  Those who work at the stadium or play on the team will be able to say they were there to see it all. 

To take the crowd analogy to the big screen, early this year there was a stampede for the exits in energy stocks reminiscent of the scene in the Will Ferrell movie Semi-Pro when he wrestles a bear at mid-court and it escapes the cage.  The last month or so it’s been a stampede to get back in. 

Here’s hoping 2021 is the year when the sector avoids the annual 100-year event and all that free cash flow shows up.

Status Update: Huge Bounce in November

Earlier this week, I published a wrap up of monthly, quarter-to-date and year-to-date figures at month end.  Since then, MLPs have rallied an additional 13%, midstream an additional 8%, but below is the summary of the month, and you can click here to get the full details.

November was the second-best month for the sector ever, it was far and away the best November ever.  Not really what you’d expect in a month that saw the election of a Democrat as the next President in a time when regulatory challenges to fossil fuels have been growing.  But it was all the vaccine and economic re-opening potential that sparked a value rally and interest in energy stocks.

Winners & Losers

MLPs

G&P and liquids names dominated the list of MLP winners this week.  Each of the top 5 was up 15%+.  Each MLP in the bottom 5 this week is not in the major MLP ETFs.  The gasoline distribution MLPs (CAPL, SUN, GLP) were all in the bottom 5.  Rotation into midstream and energy stocks generally left these names on the outside looking in.

OMP repeated in the top 5 week-over-week.  SUN repeated in the bottom 5.  Despite the big moves from stocks this week, not much changed on the YTD leaderboard, although PAA did climb out of the bottom 5.

 

Midstream Corporations

ALTM’s run since announcing its dividend continued this week, with another 24% gain this week.  Other high-beta, upstream facing companies like ENLC, PAGP and RTLR had huge weeks too.  On the downside, the natural gas-heavy names like KMI, LNG, ETRN and WMB lagged.

ALTM and OKE repeated near the top of the group week-over-week.  KMI was the worst in the group for a second straight week.  There was serious movement on the YTD leaderboard this week.  AM extended its lead, WMB flipped positive.  But the big move was ALTM going from -30% last week to less than 15% decline YTD at the close of this week, good enough for a spot in the top 5.  The bottom 5 isn’t looking as bad either, with just two -40% names this week and no name down 50%+, huge change from a few weeks ago.

Canadian Midstream

Canadian midstream corporations were all positive, but less so than the U.S. groups.  ENB’s progress on construction of Line 3 lately has garnered some analyst upgrades and market interest that has helped it outperform TRP for the last few weeks.  Pembina, which is expected to provide 2021 guidance next week, did not get much attention this week and lagged the group.

GEI went from bottom of the group to the top week over week.  TRP repeatd near the bottom.  On the YTD leaderboard, TRP dropped two spots to third place with GEI and ENB hopping to the front of the group by a few basis points.  IPL is the downside outlier still, and Keyera moved up a spot after a few strong weeks. 

Nothing too surprising, smaller higher-beta names outperforming lately, and ENB benefitting from positive headlines on Line 3.

News of the (Midstream) World

Another week of very little news flow across midstream. The sector has not needed big splashy announcements to attract attention from the market lately, but the better stocks perform, the closer we get to a midstream company testing the equity capital markets, either secondary sales to cash out or primary shares to accelerate leverage reduction.  Stay tuned.

Capital Markets

  • None.

M&A / Growth Projects

  • California-based utility Sempra (SRE) announced integrated transactions to form new infrastructure platform (press release)
    • Announced offer for all outstanding shares of subsidiary IEnova it does not already own
    • Announced plans to unify Sempra LNG and IEnova into Sempra Infrastructure Partners
    • SRE plans to sell non-controlling interest in that new entity
  • Enbridge (ENB) announced the start of construction on the Line 3 Replacement Project after receiving all necessary permits and approvals (press release)

Other

  • Plains All American (PAA and PAGP) announced plans voluntarily transfer the stock exchange listings of its common equity securities from the NYSE to the Nasdaq, effectively 12/11/20 (press release)
    • Reducing costs was cited as the rationale for the transfer
  • Tellurian (TELL) announced CEO Meg Gentle to depart the company, replaced by Octavio Simoes (press release)