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CBRE GLOBAL INVESTORS

CBRE Global Investors, combined with CBRE Clarion Securities and CBRE Caledon, is one of the world’s leading real asset investment managers providing real estate and infrastructure investment solutions to over 500 clients worldwide.

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CBRE Global Investors is the investment management division of CBRE Group, Inc. the world’s premier commercial real estate services and investment firm.  The company’s shares trade on the New York Stock Exchange under the symbol “CBRE.”

REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Gains Again

Midstream and MLPs ran their streak of positive weeks to 5, this time trading up with oil prices even as the broader equity market and utilities were negative.  Late in the week, the market threw a couple of pails of cold water on the risk-on euphoria, sending midstream and MLPs lower Thursday and Friday.

Oil prices are closing in on the good side of $20/bbl, after some positive demand signs this week.  Natural gas prices are closing in on the good side of $2/mmbtu. Both numbers wouldn’t have seemed very appealing 4 months ago, but both would be welcome at this point.  The market is increasingly pricing in those prices and more into the outlook for energy and midstream stocks.

In energy earnings news, Shell cut its dividend 66% this week, its first cut since WWII.  Other upstream companies announced further capital expenditure cuts.  Capital preservation is the focus now, and it will lead to a decline in U.S. supply. Eventually that will help oil prices, which will lead to another cycle, but that’s a long way off.

Earnings Roundup

More specific to midstream, earnings season picked up this week with major midstream players EPD, MMP, TRP, OKE, LNG and PSXP reporting results.  EPD’s integrated platform and confident tone set a positive tone on Wednesday that pushed the sector to its 10th best day ever, also helped by huge oil price gains. 

In other news: Cheniere posted results that reassured the market of the sanctity of its contracts with offtakers, but that comfort dissipated when the sector sold off Friday.  MMP, TRP and PSXP posted solid results that helped them hold up better than others on Friday.

OKE results and reduced outlook was notable and perhaps a precursor for upcoming results for other companies with marginal basin exposure.  More of those types of midstream companies will be reporting next week, in what will be the busiest week of the season. 

Here is a list of midstream companies set to report next week, in no particular order: CEQP, Gibson, WMB, PAA, MPLX, ENBL, GEL, TCP, WES, HEP, ENB, DCP, SHLX, TRGP, HESM, ENLC, Pembina, Inter Pipeline, PBFX, NBLX.

Status Update: Best. Month. Ever.

Thursday marked the end of another month, and this one was quite a bit better than March.  The Alerian MLP Index posted by far its best return for a single month ever at nearly 50% in April.  This breaks a streak of 3 increasingly negative months to start the year.  Even with the 50% rally, the index is still off to its worst start ever after 4 months. 

April has the best positive return hit rate of any of the 12 months, trading up 21 out of the last 25 years.  May has been a seasonally weaker month, and it has the second worst hit rate for positive returns of the 12 months, trading up 11 out of 24 years.

AMNA Underperforms, but Still Ahead

The broader midstream index (AMNA) didn’t have quite the same bounce in April, but it also didn’t have the drawdown in March, so YTD it is down “only” 31.8% through 4 months.

Shorter Cycles

Given the historic nature of this month, I thought it would be fun to look at the other 9 best months ever and what the subsequent months looked like.  What goes up doesn’t tend to immediately come down in this small sample.

Below is another chart of those same months and what the subsequent 12 months of returns have been for the index.  Surprisingly, returns in the 12 months AFTER the best months ever were on average very good.  A major caveat (aside from the small sample size) is how massive the rally was this April, which makes comparisons difficult. 

It seems the time periods of downswings and upswings have become increasingly short.  In the past, selloffs and rebounds took longer to play out, so that’s another reason the 12 month returns in the chart below after the initial bounce may not be as comparable.  The most recent top 10 month was January 2019 and that’s the only month in the chart with a negative forward return.

Winners & Losers

MLPs

NGL cut its distribution 49% and announced guidance above the market’s expectations, so the stock took off, gaining 64% this week to lead the midstream universe this week.  CNXM surprised with a massive distribution cut and reduced 2020 outlook, and it sold off sharply.

DKL repeated near the top of the group, up another 34% after a 62% gain last week.  DCP went from top 5 to bottom 5 week over week. TGP repeated in the bottom 5.  GEL went from bottom 5 to top 5.  On the YTD leaderboard, SRLP rallied above its takeout offer price and is down less than 10% year to date.  Each of the top 5 are down less than 20% now after recent gains.  NGL’s huge week helped it climb out of the bottom 5 YTD, replaced by DCP. 

Midstream Corporations

U.S. midstream corporations as a group underperformed the MLPs this week, with the largest names like KMI, WMB and OKE near the bottom of the group.  ENLC and TRGP had no news but are among the volatile midstream stocks and tend to trade up in risk-on environments.  AM outperformed after reporting results, but OKE underperformed after reporting results.  Cheniere outperformed after reiterating 2020 guidance, but gave most of it back on Friday.

ENLC repeated at the top of the group week over week.  RTLR, TRGP and AM also repeated near the top.  OKE repeated near the bottom of the group.  For the YTD leaderboard, median returns in this group are well below the performance of the MLP Index.  Even after two massive performance weeks, ENLC and TRGP are near the bottom of the board for the year so far.

Canadian Midstream

Canadian stock performance had a wider than normal spread this week.  TRP was the only one in the group with news, reporting solid quarterly results, reiterating outlook for 2020 and beyond, but it was an underperformer on the week overall.  Keyera continued to recover some of its large March losses with another top of the table week of performance.

GEI repeated as the worst performing Canadian midstream company this week, perhaps losing some oil storage luster as super contango has given way to a flatter curve.  The largest two players are still leading the group YTD, and IPL remains the worst performer.

News of the (Midstream) World

Limited news flow outside of earnings, more distribution cuts and more capex cuts. 

Capital Markets

  • None.

Growth Projects / M&A

  • Several MLPs and midstream companies announced further reductions in 2020 capital expenditure plans with earnings
    • EPD reduced its capex budget by $1.1bn (press release)
    • OKE reduced its capex budget by an additional $400mm after reducing its budget by $500mm in March (press release)
    • AM reduced its capex budget by $35mm to under $250mm (press release)
    • MMP, TRP, CNXM and PSXP did not reduce capital expenditures plans with their earnings releases

Other

  • Equitrans Midstream (ETRN) announced planned recommendation to improve governance by eliminating supermajority vote requirements (press release)
  • MPLX elects Michael Hennigan chairman of MPLX (press release)

Distributions

  • 5 more MLP distribution cuts this week
    • CNXM definitely the most surprising cut of the group, a deep cut when the company was not being threatened by ratings agencies or over distributing
  • After 5 cuts this week, we are up to 22 cuts total for the quarter, see the chart below for all the dividend and distribution announcements this quarter
    • Only 6 midstream companies raised distributions this quarter, out of 54 names tracked so far