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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

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Week Thoughts: Midstream in Relief

Midstream and MLPs had their best day in a few months on Monday (AMZ +2.2%). They struggled to hold those gains the rest of the week, but did finish +1.8% vs. last week, inline with the utilities. Utilities followed a different path to +1.8%, selling off early in the week and rallying to close out the week. With interest rates shooting higher, price action for both midstream and utilities action went against traditional expectations, while the S&P 500 (-1%) and REITs (-3% this week) experienced a more conventional selloff.

Investors across the market appear to be split between those worried about inflation and those seeking safety in a potential risk-off scenario. If those twin concerns remain en vogue, midstream could be a good place to hide. Midstream stocks have visible growth to fight inflation and should hold up better in a broad market sell-off given attractive relative valuations and sustainable yields (for the most part).

But this week’s outperformance wasn’t about investors choosing midstream as a safety or inflation play, the real catalyst seemed to be the Calendar. Sentiment was negative into the quarter end and snapped back Monday.

It reminded me of a scene from the 1998 film Truman Show. Near the end of the film, Truman (Jim Carey) is on a sailboat trying to escape the TV show island he’s spent his entire life on. Show creator and producer Christoph (played by Ed Harris) tells his junior producer to capsize the little sailboat by turning up the waves and wind. Truman is defiant and yells up at the sky, “Is that all you got?”. Christoph keeps escalating waves and wind, until it seems like Truman is just about dead. Then Christoph wavers: “That’s Enough”. Truman slowly regains consciousness and triumphantly sails to the edge of his fake world and escapes.

Has midstream had enough? Is midstream ready to sustain outperformance through year end and beyond? Or will headwinds like Election Day, zombie MLPs and tax-loss selling hold the sector back? This upcoming earnings season may be the difference maker in either direction.

Winners & Losers

NBLX bounced back hard this week, gaining more than 10% on Monday alone. DCP and others who have significant Colorado operations bounced this week too, as it appears a fresh month brought fresh buyers willing to take the other side of the Colorado regulatory trade. A few others that got caught up in the Colorado short trade didn’t bounce quite so hard (TGE, SEMG, NGL come to mind).

TGP went from first last week to near the bottom this week. NBLX’s big week helped it climb out of the bottom 5 YTD. EQM replaced NBLX in the bottom 5, hurt by further challenges on the Mountain Valley Pipeline.

Final note: I had to remove FGP and BKEP from the winners & losers charts, both have less than $250mm in market cap, making them largely irrelevant. FGP was down another 23% this week, and is down 57% this year. BKEP is also down more than 50% YTD.

Midstream Corporations & General Partners

In the GP and midstream corporation group, WGP led the way, benefitting from better Colorado sentiment like the MLPs above. TRGP’s parade of analyst upgrades helped it sustain recent strength. ENLC and AMGP traded well, even thought neither had simplification news. AMGP has apparently moved the goalpost on its deadline for special committee process resolution.

LNG was the only meaningfully negative performer. There was no Cheniere-specific news, but from week to week, it does tend to move on global trade war headlines and maybe was somehow sold just because LNG Canada FID was reached, despite its extremely long lead-time. Cheniere did outperform last week and YTD, so may have just been a source of funds on rotation into other names this week.

WGP went from worst to first this week. OKE underperformed the group for a second straight week. On the YTD leaderboard, TRGP jumped up into the second spot overall.

Canadian Midstream

Canadian midstream outperformed the rest of midstream this week. Helped by a flurry of positive headlines, including a rail agreement for a producer that improved Canadian energy sentiment, the new NAFTA agreement, and LNG Canada’s official FID. The 3 largest players (ENB, TRP, PPL) all traded well, but Gibson outpaced them all.

ENB bounced back from being the worst performer last week. Pembina made it two straight weeks of outperformance, and is now positive YTD. ENB and TRP remain in double digit negative territory, but are no longer the worst performers in the group, now that Inter Pipeline has taken the bottom spot. Gibson is well out in front at more than 20% total return this year.

News of the (Midstream) World

Another week of no news on the simplification front. EPD flexed its investment grade muscles to issue $3bn of new senior notes. WMB reached a milestone and officially completed Atlantic Sunrise, while TRP announced its intent to embark on a massive gas pipeline project of its own North of the border. Distribution season kicked off, which means earnings season is nigh with more catalysts on the horizon.

Capital Markets

  • Enterprise Products (EPD) priced public offering of $3bn of senior notes (press release)
    • $750mm of 3.50% notes due 2022 priced at 99.985% of par
    • $1bn of 4.15% notes due 2028 priced at 99.764% of par
    • $1.25bn of 4.80% notes due 2049 priced at 99.390% of par
  • DCP Midstream (DCP) priced public offering of $100mm of its 7.95% Series C Fixed-to-Floating rate cumulative redeemable perpetual preferred units (press release)
    • Units will have distributions of 7.95% up to October 23, 2023, then switch to 3-month LIBOR +4.882%
  • Westlake Chemical Partners (WLKP) filed equity distribution agreement to sell up to $50mm worth of common units at-the-market (filing)

Growth Projects / M&A

  • TransCanada (TRP-CA) announced final investment decision of the Coastal GasLink pipeline project after the sanctioning of the LNG Canada natural gas liquefaction facility was announced (press release)
    • Coastal GasLink is a 420-mile, 2.1 Bcf/d pipeline designed to transport natural gas from the Montney to the LNG Canada facility in Kitimat, BC
    • Pipeline has the potential for expansion of up to 5 Bcf/d
    • Project is expected to cost C$6.2bn and is backed by 25-year transportation agreements with the LNG Canada participants
  • BP Midstream (BPMP) announced $468mm dropdown of minority stakes in Mardi Gras Transportation System, KM-Phoenix Holdings, and URSA Oil Pipeline from BP (press release)
    • BPMP will acquire 22.6916% interest in URSA, 25% in KM-Phoenix, and will increase its stake in Mardi Gras from 20% to 65%
    • Purchase price represents a 9.4x multiple of the 2019-2020 forward average of EBITDA
    • Acquisition will be financed with debt while ND/EBITDA is expected to remain under 3.5x
  • Noble Midstream (NBLX) announced a 50/50 JV with Salt Creek Midstream to develop a crude oil pipeline and gathering system in the Delaware Basin (press release)
    • The 95-mile, 200,000 bpd pipeline will originate in Pecos County, TX and will be served by a combination of in-field crude gathering lines and a trunkline to Wink Hib
    • The JV will be underpinned by acreage contributions from NBLX and Salt Creek of approximately 180,000 dedicated acres from Noble Energy (NBL) and five other Delaware Basin producers, with a line of sight to additional dedications totaling approximately 100,000 acres
  • Private company EPIC Midstream announced its NGL Pipeline will begin interim crude oil service once construction of the pipe is completed in 3Q19 (MarketWatch)
    • The NGL Pipeline will convert back to NGL service at completion of the EPIC Crude Oil Pipeline by January 2020
    • Additionally, EPIC announced it will upsize its Crude Oil Pipeline from a 24-inch line to a 30-inch line expanding its capacity to 600,000 bpd with ability to increase it to 900,000 bpd
  • Williams (WMB) announced the FERC has approved its request to place Atlantic Sunrise project into full service (press release)
  • Kinder Morgan (KMI) announced binding open season for additional capacity of the Plantation Pipe Line System (press release)

Distribution Announcements