After a few flattish weeks, midstream grinded higher this week, finishing up 1.2%. Midstream lagged oil prices, energy stocks and the S&P 500. The U.S. 10-year treasury rate bounced back up to 2.50%, and utilities underperformed.
This week’s gains across the board pushed the S&P 500 to its highest point since October, WTI oil price to its highest point since November, the Alerian MLP Total Return Index to its highest point since October, and the Alerian Midstream Energy Total Return Index to its highest point since early August. Things generally feel pretty good, which as noted in last week’s post, is on average how things tend to feel this time of year, on average.
For the last few quarters, the topic of buybacks for midstream companies and MLPs has been brought up in public forums. It all seemed very theoretical in most cases, because of leverage reduction priorities and large capex backlogs, but it was exciting to ponder now that most MLPs no longer have IDRs in the way to make buybacks impractical.
One of the few exceptions was Plains All American, whose repeated distribution cuts, and successful asset sale program set it up to have high enough free cash flow to seriously contemplate buy-backs this year. This week, PAA raised its distribution 20%, by around $175mm annually, and was mum on buybacks. PAA isn’t quite as special in terms of its financial flexibility as it was a week ago.
This Friday marked the 25th anniversary of Nirvana lead singer Kurt Cobain’s death. His last concert in Houston was 5 months earlier, on December 6, 1993 at the Astro Arena (now the NRG Arena). It was the In Utero tour, and the Breeders were the opening act for Nirvana.
I know all of this because of the Internet, but also because I was there. It was my first concert, tagging along with my older brother and his friends. I don’t remember much about that night, but I definitely remember Nirvana’s music and the music videos. I probably bought the Nevermind CD at the Sound Warehouse off I-10 and Echo Lane near Memorial High School, in what is now a Ross Dress for Less store, apparently.
I tried to tie this bit of nostalgia back to midstream by connecting it to Houston, but there may also be an analogy in there somewhere. Kurt Cobain died at 27 years old, while Nirvana drummer Dave Grohl is still rocking on at age 50. Similarly, certain high growth MLPs or aggressively-managed MLPs in the past attracted enthusiasm in the market before flaming out, while others have been managed more conservatively and created sustained value for investors.
Around the time of that concert, the Northern Border Partners (NBP) IPO had just happened (in September 1993). NBP would eventually become ONEOK Partners, which is now ONEOK, Inc. (OKE). Its life as an MLP lasted 24 years, longer than most MLPs, but it has re-invented itself as a midstream corporation and is rocking on, alongside many others this year so far.
Poll Question Recap
Last week’s poll question had a clear winner. The question was which of the main benchmarks I reference on this site for midstream will outperform in the second quarter: AMZ or AMNA. More than 2/3rds of you selected the AMNA, even after it crushed the AMZ in the first quarter, which means you believe the performance gap will persist. That’s an interesting setup ahead of the EPD analyst day where EPD will likely re-iterate its position that for now the MLP structure still makes the most sense for them…for now.
Winners & Losers
TOO led all MLPs this week, helped by a new financing announcement. APU gained 14.5% after its buyout was announced. No other news among the winners or losers this week.
No repeats in the top or bottom 5 week over week. On the YTD leaderboard, APU climbed all the way to the second spot from out of the top 5 last week. SRLP dropped out of the top 5.
On the YTD bottom 5, it should be no surprise that 3 of the 5 worst performing MLPs have IDRs in their structure (CNXM, WLKP, BPMP), and a 4th one (SMLP) had an egregiously dilutive IDR elimination transaction this year.
U.S. midstream corporations underperformed MLPs and Canada this week. PAGP announced a 20% distribution increase and lower long-term leverage targets, which may have helped it outperform this week. There was no news elsewhere in this group. TRGP was weak and market chatter was that very low natural gas prices at Waha and Houston Ship Channel’s temporary shutdown has investors worried about results.
Many of last week’s best performers were in the bottom 5 this week. AM was an outlier with a repeat in the top 5, and LNG was a repeat in the bottom 5. On the YTD leaderboard, ENLC remains in the overall lead and AM returned to the top 5, displacing PAGP. SEMG climbed out of the bottom 5 after big gains this week.
Big-caps outperformed in a strong week for Canadian midstream overall. The credit downgrade for TRP at Moody’s was not a problem for the equity price. ENB and Pembina were a close second. GEI’s continued progress on jettisoning non-core assets probably contributed to relatively strong performance.
Year-to-date, TransCanada is now up 30%+ in USD terms to lead the group. Enbridge has fallen behind, but is still up 20%+.
News of the (Midstream) World
Some IPO progress happened this week, as RTLR appears closer to launching its IPO, which would be the first since late 2017. Beyond that it was more of the same. More IDR/simplification progress with the APU deal, which was positive for the stock this week, but will result in some big tax bills this time next year. More big private equity check written for midstream assets. More indications of that second wave LNG commercialization.
Growth Projects / M&A