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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Goes Green on Vaccine

Energy stocks were buoyed by the big vaccine news Monday, and the gains held for the week overall.  XOP spiked 20.4% this week, XLE was up 17.1%.  Midstream wasn’t quite that strong but posted with historically significant gains Monday and for the week (see below). 

So What? So, Let’s Dance

Oil prices helped this week, but midstream stocks were up Friday even as oil prices fell, which was nice.  A rising energy sentiment tide lifted all boats, as not one midstream stock or MLP traded down on the week. 

Midstream companies continue to whittle leverage down and take costs out of their systems, but the pace remains slow, as noted here in previous weeks, and large-scale consolidation remains elusive.  In the absence of material midstream news, it was a week of re-positioning after strong earnings.  This week’s price action offered hope of a shorter and less dramatic tax-loss selling season for midstream this year than in recent years. 

I hope everyone enjoyed the (hopefully) unique situation of The Masters being played in mid-November.  Midstream dusted off its green jacket this week and relived some glory days. 

We’ll take it, even if we’ve been conditioned to expect downside volatility after such positive inflections.  Along with rising sentiment came rising COVID-19 case counts and lockdowns across the country and the world.  Caution is certainly warranted, quality names within midstream remain the play.  Better to lay up and take par than stretch for the green. 

Easier Comps Ahead for Trailing Return

It’s worth noting that after big gains this week, AMNA and AMZ returns far this year are no longer on pace to be the worst year ever.  To finish ahead of those terrible years would be quite a feat after this year’s staggering volatility.

  • AMNA (data back to 2014) had its worst annual return ever in 2015 at 37.3%
  • AMZ (data back to 1997) had its worst annual return ever in 2008 at 36.9%

Trailing 12-month returns are improving as well (October 2019 was a bad month) and will continue to improve (November 2019 was also a big down month). 

  • AMZ is 50% higher than end of March, but flat from end of April (distributions included)
  • AMNA is 32% higher than end of March, but up just 2% from end of April (dividends included)

So, big year over year gains will emerge when we get past March 2021 and even out after April 2021.  That backward-looking view of returns may not have much value in trying to determine where midstream goes from here.  Fundamentals (volumes, free cash flow), energy stock sentiment and fund flows will clearly matter more that lapping these volatile months.  For me, as a midstream historian, I just find it interesting and thought you might too.

Contextualizing This Week’s Moves

The big bounce Monday was partly a catchup from underperformance last week, partly a resurgence in value stock sentiment across the market.  It was a top 10 day for MLPs all-time and a top 5 day for Midstream.  Similar inflections have been mostly followed by good short-term performance when they happened earlier this year.

Midstream was able to hold those gains and add to them late in the week to finish with a top 5 overall week.

Winners & Losers

MLPs

WES led all MLPs this week after reporting strong earnings and guidance well ahead of expectations, which coincided with a strong report from its sponsor OXY.  Every one of the top 5 was up 15%+ this week.  GEL bounced 24%, which in most weeks would be good enough to lead all MLPs.  NS may have benefitted from some positive readthrough from the IMTT sale by MIC. 

The bottom 5 included a few of the safe-haven MLPs like CQP and EVA, which probably were sources for rotation into higher beta names.  It was notable that NBLX was one of the losers, given the similarity of asset exposure to WES, but NBLX underperforming WES may have been a pair trade unwind situation.

Week over week, WES went from bottom 5 to top 5.  NGL went from top 5 to bottom 5.  YTD, 4 MLPs are positive YTD so far.  In the bottom 5, GEL’s strong week helped it hop ahead of NGL for 4th worst.

Midstream Corporations

Median U.S. corporation performance was nearly 12% this week, which lagged the MLP Index.  Higher beta names tied to producer activity outlook like TRGP, OKE, AM and PAGP were outperformers.  KMI also had a strong week of performance and closed the week back above $13/share for the first time since early October.  ETRN lagged on further MVP challenges.  LNG lagged after outperforming of late. 

TRGP repeated near the top of the group, OKE went from worst to close to first.  YTD, only AM is positive, but WMB is in single digit territory.  LNG and HESM are relative winners for the year, both down less than 20% on stability and continuity of strategic plans.

Canadian Midstream

Canadian midstream lagged this week, but all the stocks traded up.  Inter Pipeline gave some back on Friday, but finished with best overall.  Keyera and Pembina were strong performers as well, helped by solid results and perhaps benefitting from some rotation within Canada away from the larger names in a risk-on oil rally week.

ENB went from best to worst week over week, but it held second on the YTD leaderboard.  TRP continues to grind higher, but still lags the best performers in other areas of midstream (WMB, AM, LNG).

 

 

 

News of the (Midstream) World

Light news week overall, with some positive and negative action on regulatory news for Enbridge and a large sale of a terminal business to private equity showing there remains some private equity interest in demand oriented midstream assets.

Capital Markets

  • Enterprise Products (EPD) filed S-3 to register up to $2.5bn (filing)
    • This is not an offering or anything other than a normal course re-up of a registration, but it momentarily alarmed some folks out there who were concerned EPD might be doing a big M&A deal or something
  • Venom Energy Partners (VNOM) announced authorization for $100mm share repurchase program (press release)

M&A / Growth Projects

  • Macquarie Infrastructure Corporation (MIC) announced sale of its International-Matex Tank Terminals (IMTT) business to a Riverstone Holdings, LLC fund for $2.685bn (press release)
    • IMTT is a bulk liquid storage and handling business that includes 19 terminals scattered across the U.S. with 2 in Canada, with key locations in Bayonne, New Jersey and St. Rose, Louisiana
    • MIC plans to use the proceeds to pay a special dividend of $10.75/share and to repay or offset $400mm in holding company debt

Other

  • Enbridge (ENB) received a key water permit approval from the Minnesota Pollution Control Agency and remaining DNR permits for Line 3 Replacement Project (press release)
  • ENB’s Line 5 faces attempts from the State of Michigan to shut down in the Straits of Mackinac, and responded with a press release Friday (press release)