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REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Inaction

Quiet week in the stock market this week, which translated into a quiet week for midstream as well.  The AMNA finished basically unchanged, while the MLP Index was slightly lower.  AMNA’s 18% total return year to date is now a staggering 1200 bps YTD and YOY lead over the AMZ.  Commodity prices were mixed and not much of a driver for midstream this week.  Interest rates are low and are down 143 basis points year over year, but were flat week over week.

Kinder Morgan (KMI) reported solid results from midstream assets, especially in its natural gas segment, on Wednesday.  KMI’s non-midstream assets were a drag on results, but won’t be a drag on capital at these commodity prices, because KMI isn’t going to keep feeding capital to it’s CO2 operation.  As KMI’s cash flow from the CO2 business whithers without investment, that piece becomes less relevant to the overall business.  The less relevant the better for the stock price longer term.

As noted above, midstream earnings season is officially underway after KMI reported on Wednesday.  But we have more than a week to wait until the next large player reports results (EPD reports on 10/28). 

The long lull reminds of the trope in movies (particularly in movies with a big fight at the end) where there is an initial wave of bad guys that get dispatched rather easily, followed by a lull before a much larger wave comes that ends up being much harder. 

  • It happened in the first Avengers movie, when the team destroys that first big alien flying catepillar thing, then several more show up.
  • It happened in Kill Bill Vol. 1, when Beatrix kills several of the “Crazy 88” and Oren Ishii’s bodyguard Gogo. Then 80 or so more bad guys with swords show up that Beatrix dispatches before an ultimate showdown with O-Ren Ishii.
  • It happened in the original Teenage Mutant Ninja Turltes movie, when a few of the footclan attack the turtles in their underground hideout and the turtles take them out. In dialogue reflective of the quality of the film, one of the turtles says, “Gee, I hope there are more of them.” Then hundreds more show up.

But, as Joker just hit the theaters, it also reminds me of the scene in the film the Dark Knight when Heath Ledger’s joker blows up the hospital, but not all of the bombs go off at once and he’s visibly confused about it.  He beats on the button again, before the rest of the bombs go off and he walks off satisfied.

In the meantime, as we await more company-specific news in the weeks to come, the general grossing down of MLP and midstream exposure continues.

Winners & Losers

OMP led all MLPs and HESM was in the top 5 both on no news, maybe it was a Bakken thing.   HEP had a furious Friday rally after confirming current distribution through 2020, stopping what had been a dramatic month over month fall in its stock price.  NGL, DCP and WES were among the biggest losers, and each of those has significant assets in Colorado. 

Further regulatory uncertainty popped up this week when a study by the Colorado Department of Public Health and Environment was released citing concerns about potential health impact of oil and gas development in the state.  It appears to be mostly headline noise at this point, but the Colorado Oil & Gas Conservation Commission did indicate there would likely be a regulatory response.

TGP went from first to worst week over week.  HEP went from bottom 5 last week to top 5 this week.  NGL and DCP repeated in the bottom 5.  On the YTD leaderboard, CAPL joined the top 5.  NGL dropped from the best performer overall two weeks ago to out of the top 5.  ENBL replaced HEP in the bottom 5 YTD.

Midstream Corporations

KMI earnings wasn’t much of a catalyst in either direction this week, but it did underperform the U.S. corporation group slightly.  ETRN led this group with a big gain on no news other than stronger natural gas prices.  ET traded up this week, and SEMG trades with ET now with the pending merger, so it had a strong week.

ETRN and LNG repeated among the outperformers this week vs. last week.  ENLC, ALTM and TGE repeated in the bottom 5 week over week.  On the YTD leaderboard, no changes for the top 5, but some movement among the bottom 5, where ELNC continues to fall down the leaderboard and landed at 3rd worst for the year.

Canadian Midstream

Canadian midstream corporations outperformed MLPs and midstream corporations on average, with GEI as the lone outlier with a greater than 1% move in either direction.

On the YTD leaderboard, no changes to the order, but GEI broke above 30% total return and PPL broke back above 25% total return.

News of the (Midstream) World

Very light news week, until a head scratching deal Friday where a publicly-traded utility announced the purchase of Haynesville natural gas gathering assets at more than 10x EBITDA.  The DTE purchase announced Friday was a step out from DTE’s existing footprint, but at current utility valuations, buying almost anything is accretive.

Capital Markets

  • Antero Midstream (AM) disclosed the purchase of $25mm worth of shares in 3Q as part of its previously-announced $300mm buyback program (press release)

Growth Projects / M&A

  • DTE Energy (DTE) announced the acquisition of Haynesville gathering systems from Momentum Midstream and Indigo Natural Resources for $2.25bn in cash, plus a $400mm milestone payment upon completion of the gathering pipeline in H2 2020 (press release)
    • Indigo is the primary gas producer supplying the gathering system which has a current capacity of 1.2 Bcf/d with the ability to expand to 2.5 Bcf/d
    • The gathering pipeline is a 150-mile pipe with capacity of 1.0 Bcf/d with the ability to economically expand to 2.0 Bcf/d with compression
    • DTE reported a 10x EBITDA multiple, which is a higher multiple than MLPs with similar gathering assets backed by a single producer are trading, another data point on relative valuation among publicly-traded midstream companies as compared with private transactions
    • The gathering system is fully contracted with a remaining tenor of 13.5 years and the pipeline has a 10-year contract
    • DTE will finance the deal with a 50/50 debt/equity mix with equity consisting of $1bn mandatory convertibles and a planned $300mm of common equity
    • Deal is expected to close Q4 2019
  • With earnings, Kinder Morgan (KMI) announced a delay in the expected in-service date of its Permian Highway Pipeline project, from 4Q 2020 to early 2021 (press release)

Other

  • Western Midstream (WES) announced Michael Pearl as new CFO, replacing Jaime Casas, who is transitioning to the role of Treasurer at sponsor Occidental Petroleum (OXY) (press release)

Distribution / Dividend Announcements

  • The pace of announcements picked up some this week with 14 announcements, including a couple of notable ones.
    • AM chose to hold distributions flat and opt for buybacks instead
    • HEP indicated intent to maintain distribution for all of 2020, belying rumors of a distribution cut that had sent its stock lower