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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Hosts Another Large Gathering

Another vaccine update, another rally for energy stocks and midstream stocks.  Midstream was green all week until taking a breather Friday.  Stocks and the infrastructure index were slightly negative, and utilities were hit hard. 

Oil prices were supportive of energy and midstream stocks, but there was clearly some rotation into midstream at the expense of utilities and other lower volatility stocks.  The rotation and repositioning across the market in response to the vaccine news has been swift and forceful.

The MLP Index (including distributions) closed the week at its highest point since June and has posted total return of 22% in 2 weeks and 31% since September 24th.  AMNA finished the week at its highest point since mid-August, up 17% in 2 weeks.

For the AMNA, it was a top 15 week since 2014 (when the index history begins) and the first time the index has had 5%+ returns in consecutive weeks.

For the MLP Index, it was a top 20 all-time (since 1996) week of performance.  The back-to-back strong weeks is not as rare for the AMZ.  Earlier this year, AMZ was up 5%+ for 5 consecutive weeks.  This was the 11th 5%+ return week of the year for AMZ, compared with 30 such weeks combined spread across the other 24 years of index history.

One More Opportunity

The weather in my area was wild this week.  We had the first real cold snap of the year, with lows well below freezing early in the week.  But by Friday it was 65 degrees and sunny.  The return to warmth late in the week offered one last chance for me to clean things up from the fall season. 

We spent a lot of time this year creating what my wife calls a “backyard oasis” in the far corner of the backyard.  The oasis included 3 hammocks, a fire pit and a few other features.  The lantern fly plague in the Spring made the oasis inhospitable for the most part, but this Fall the kids have spent time out there reading, we’ve roasted marshmallows out there, etc.  But the time has come to shut it down.

This Friday’s sunny day was the perfect chance for me to finally take down those hammocks and store some of the stuff back there under comfortable circumstances, rather than sometime next month when conditions would be much less comfortable.

Inflection…Reflection…Rotation?

Like the warm weather this week, the recent 20-30% rally off the bottom for midstream should be viewed as one more opportunity to re-assess exposure. 

In June, after the last major positive inflection and furious rally off the bottom, I wrote a post called “Infrastructure: Another Midstream Exit Opportunity”. 

The point of the post was midstream returns have been short-cycle and volatile the last 5 years, and if that level of volatility was uncomfortable for you when stocks were down, then after a big upswing is a good time to re-evaluate the exposure.   The post suggested a broader infrastructure allocation offered more of what investors originally sought when buying midstream.

Like the classic quote from the poker film Rounders that often reminds me of MLPs: “Some people, pros even, won’t play No-Limit [Hold ‘em].  They can’t handle the swings.”  If you find your stomach churning on weeks when midstream volatility is to the downside, maybe midstream isn’t the right place for you to invest. 

Broader infrastructure funds (with some very large exceptions) or infrastructure allocations tend to have exposure to midstream, which will help those funds capture some of the upside midstream investors seek.  But with diversification and some counter-cyclical exposure, the asset class of infrastructure has delivered superior risk-adjusted returns historically.

The above is not a pronouncement that midstream stocks will go down from here.  Rather it is reminder of how awful midstream exposure feels when things are going bad, and a reminder to avoid that feeling, exiting after a 20-30% bounce is probably better than panic selling when midstream stocks have their next bout of high volatility and falling values.

Winners & Losers

MLPs

WES dominated MLPs for a second straight week, up another 20%.  WES is now up 72.6% in two weeks.  But more heads were probably turned by the big move by ET on strong volume.  On the other end of the spectrum, SPH was the only negative MLP this week, maybe pressured by warmer weather outlook.  EPD lagged the index by 500 bps point, which is probably some kind of record for a 10% weight in that benchmark. 

WES and NS repeated in the top 5.  EVA repeated in the bottom 5 week over week.  On the YTD leaderboard, EVA is still comfortably ahead of the group.  PAA lagged this week and returned to the bottom 5 YTD.

Midstream Corporations

Every name in this group was positive this week, but the median return underperformed the MLP Index.  High beta G&P names in the corporation group dominated the top 5.  ALTM’s big rally (+272% since announcing dividend) helped it graduate back into the $250mm+ market cap and back into the chart this week.  YTD leaders AM and WMB were the worst performers in the group this week, probably a combination of rotation away from winners and lower natural gas prices.

TRGP repeated near the top of the group and is up 46% since October 28th.  OKE’s strong performance last week lost some steam this week.  On the YTD leaderboard, no big changes, but ETRN replaced ENLC in the bottom 5 even with a double digit return this week.

Canadian Midstream

Canadian midstream had a strong week as well, but the biggest names lagged as you’d expect in a risk-on week across midstream.  TRP’s analyst day event was largely a non-event, but highlighted stability and opportunity across its vast footprint.  IPL gave up some of its large gains from last week and was the only negative performer this week. 

Keyera and Pembina were strong again, picking up some relative performance vs. other YTD underperformer Inter Pipeline.  Gibson returned to second place YTD, and TRP is making steady progress towards a flat return, down just 16% in USD terms.

News of the (Midstream) World

2020 is almost over and the U.S. has finally seen its first LNG export facility FID of the year with SRE’s announcement earlier this week.  That announcement is a reminder of the benefits of already operating a facility given the long lead time and permitting challenges required to build one.  Speaking of long lead time and permitting challenges, TRP continues to work towards making Keystone XL a reality, more than a decade into the process. 

Capital Markets

  • Targa Resources (TRGP) announced full redemption of 9.0% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (press release)
    • TRGP intends to redeem all $125mm of its 5.0mm units
  • Gibson Energy (GEI-CA) announced redemption of 5.25% Convertible Unsecured Subordinated Debentures (press release)
    • GEI intends to redeem all $99.3mm of principal amount outstanding of its currently outstanding debentures due July 2021

M&A / Growth Projects

  • TC Energy (TRP-CA) announced agreement with Natural Law Energy which allows NLE to make an equity investment of up to $1bn in the Keystone XL pipeline project (press release)
  • Sempra (SRE) and Mexican subsidiary IEnova announced FID for Energia Costa Azul (ECA) LNG export facility Phase 1 (press release)
    • ECA facility is located in Baja California, Mexico
    • Phase 1 is expected to cost $2bn, with first LNG expected in 2024