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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Leads at Midpoint

MLPs finished positive for the week, making it three straight positive weeks for MLPs to close out strong month of returns helped by a bounce back in oil prices and broad equity markets.  Utilities were soft this week, and came in with first half returns below midstream and below the S&P 500, despite nearly 70 basis point reduction in the 10-year treasury interest rate.

Challenges remain in the NGL and LNG value chains globally, but given the visible nature of demand or bottleneck fixes coming online as we approach the end of the summer, the market may look through some commodity or margin-based weakness in 2Q results. 

For some of the lighter NGLs, this has become basically an annual process of seeing very low ethane prices today and heavy ethane rejection, but then enthusiasm builds and midstream mgmt teams start building slides with potential ethane recovery upside.

Status Update: Back in Black

MLPs were positive in June, breaking a two-month losing streak and finishing the second quarter just above flat, making it technically two straight positive quarters and 4 positive quarters out of the last 5.

Looking ahead, July is on average a positive month, has been positive in 17 of the last 23 years and has been positive for each of the last 3 years.  July is the third best average return month after January and April.

Midstream Monthly Check-In

The broader midstream index, AMNA, posted a positive June as well (+3.6%) and also finished the second quarter positive, making it 4 positive quarters out of the last 5 for midstream as well.  YTD AMNA has benefitted from strength in large capitalization corporations in both the U.S. and Canada, which the MLP Index does not include, which largely explains the large delta between the two indexes.

Despite the dispersion in index returns, it hasn’t been a great stock-picking environment, unless you picked the top 5 largest midstream corporations.

First Half Comps

See below for a breakdown of the best opening six months of the year ever for MLPs and for the AMNA.  This year ranks as the 7th best for the MLP Index of all time, but it was the best for AMNA, which has a shorter backcast of data.  Ranked alongside MLP Index historical returns, 2019’s AMNA return thus far would rank 4th all time, after 2009, 2001 and 2003. 

Only twice in the last 24 years have MLPs started the first 6 months of a year with 15%+ total returns only to see negative returns in the second half of the year.  Those two times (2007 and 2014) had very MLP-specific issues combined with some macro challenges.

The second half of 2007 saw stress in MLP equity capital markets when unregistered PIPE deals into mostly upstream MLPs became a challenge when some owners of those units saw redemptions and needed liquidity.   The second half of 2014 was when OPEC chose not to support oil prices and oil’s tailspin began.

Other than those two years, 15%+ returns in the first half has been followed by second half strength and in some cases very strong second half returns.

Winners & Losers

Among midstream MLPs of consequence, WES led the way this week with a 7% gain, presumably on investor optimism that a new sponsor could mean positive things for the L.P. owners of WES.  Recent historical corollaries ENLC and TGE would suggest that optimism is misplaced.  OMP similarly appears to be seeing interest on the potential that its sponsor may seek to monetize its midstream assets.  On the downside, ET traded down on no news, holding back the market capitalization weighted return of the MLP group this week. 

CINR went from almost worst to first week over week.  SPH and PSXP went from top 5 last week to bottom 5 this week.  On the YTD leaderboard, each of the top 5 have 40%+ total returns through the first half of the year, with NGL in the lead and on pace for 120%+ returns for the full year.  Only two MLPs are down double digits for the year, MMLP and SMLP.

Midstream Corporations

Midstream corporation returns had a tighter spread than MLPs this week, and no single name was up more than 5%.  KMI showed rare weakness this week on no news.  AM had a successful upsized bond issuance and joined the Russell 2000 with the rebalance on Friday, but still managed to finish near the bottom of the group. 

ETRN gave back most of its gains from last week, while TRGP held its gains and position in the top 5 week to week.  At the six-month mark, the YTD leaderboard has 3 big cap S&P 500 members at the top, each with more than 30% total returns.  ENLC escaped the bottom 5 and ALTM is on pace for 100% losses for the full year.

TGE was flat this week, after raising questions with poor stock price performance over the last month on no company-specific news.  The market confusion on TGE stock price performance peaked with a Bloomberg article late in the week that returned to well-worn bear arguments.  The article may have marked the bottom, because TGE was one of the better performers on Friday.

Canadian Midstream

Canadian midstream outperformed U.S. corporations and MLPs this week.  Enbridge shrugged off more noise in Michigan to post the best performance for the week, while the smallest two names (KML and GEI) were underperformers.

ENB beat TRP for a second straight week, but TRP still has twice the return YTD as we close the first half of the year.  The top 5 best performers YTD have all have 20%+ returns in USD as Canada continues to grind higher.

News of the (Midstream) World

Journalists around the midstream space were quite active this week in reporting potential transactions.  There was also $3.15bn worth of debt capital markets activity.  On the project front, there was FID from SMLP on Double E with a JV, plus a couple of open season announcements.  There were a few obscure M&A transactions, including a mineral rights deal and two asset deals up in Canada, plus an IDR elimination.

Capital Markets

  • Enterprise Products (EPD) priced public offering of a total of $2.5bn of senior notes (press release), including:
    • $1.25bn of 3.125% notes due 2029 at 99.955% of par
    • $1.25bn of 4.20% notes due 2050 at 99.792% of par
  • Antero Midstream (AM) priced private offering of $650mm of 5.75% senior notes due 2028 at par (press release)
    • Offer was upsized from $600mm
  • Private-equity backed Marcellus G&P company Blue Racer Midstream would like to go public, according to Bloomberg (Bloomberg article)
    • Dominion sold its stake in Blue Racer for $1.5bn (15x EBITDA multiple) to First Reserve in a transaction announced in November 2018
    • Blue Racer is a 50/50 JV between First Reserve and Caiman Energy II, which is owned by Williams (WMB), Oaktree Capital, and EnCap Flatrock Midstream

Growth Projects / M&A

  • Summit Midstream (SMLP) announced FID to proceed with the Double E Pipeline and has secured a JV partner, presumed to be an Exxon affiliate (press release)
    • Double E has secured 10-year take-or-pay volume commitments for a substantial majority of its throughput capacity of 1.35 Bcf/d
    • SMLP provided a net cost update for the project, now expected to be $350mm
    • SMLP did not disclose what portion of the project SMLP will retain relative to its JV partner, but prior press releases have indicated Exxon had option to acquire up to 50%
  • Kinder Morgan (KMI) and Tallgrass Energy (TGE) announced joint tariff open season on Hiland and Pony Express crude oil systems for oil transportation from the Bakken to Cushing, OK (press release)
    • Open season will end on July 28th
  • GasLog (GLOG) and GasLog Partners (GLOP) announced agreement to eliminate IDRs in exchange for newly issued LP units (6-K filing)
    • In exchange for the IDRs, GLOG will receive 2.53mm common units and 2.49mm Class B units
    • GLOP’s IDR payments equated to roughly ~7.5% of distributions, in 25% tier
    • This is a datapoint for MLPs who say too early to remove IDRs. GLOP IDRs were less than: SHLX, PSXP, DKL, SRLP, SUN, NBLX, CNXM, EVA
      • Early IDR removals recently: USAC, PBFX, SMLP (but at big premium)
  • Alliance Resource Partners (ARLP) announced agreement to acquire Permian Basin oil and gas mineral interests from Wing Resources for $145mm in cash (press release)
    • The pivot from coal continues
  • Magellan Midstream (MMP) reported to be exploring sale of a 35% interest in Longhorn Pipeline in a transaction that could be worth $2bn (Reuters)
  • Bloomberg reported that Occidental (OXY) is seeking to sell majority stake in Western Gas (WES), which is currently worth more than $7bn
    • As I was quoted as saying this week (read here), I am not surprised by this story, I thought the assumption was that OXY would be selling WES, and they probably want to sell 100% of their stake
    • But size of the stake is quite large, so the buyer pool to take all of it down is pretty small
    • Rather than a buyout, I expect WES to remain a public company in a similar fashion to two other deals we saw in the last 12 months (ENLC and TGE) that involved private equity
    • No matter who the new sponsor is, the sponsor is by default going to be a lesser sponsor that APC was
  • Crossamerica (CAPL) announced agreement to sell 46 sites to Applegreen and entered into master fuel supply and lease agreements (press release)
    • CAPL has now “dealerized” all of its company-operated sites, with full focus now on wholesale operations 
  • TC Energy (TRP-CA) announced binding open season for Keystone Pipeline System (press release)
  • Paramount Resources announced C$470mm sale of its Karr 6-18 natural gas facility to private company CSV Midstream Solutions (press release)
  • Peridae Energy Limited (PEA-CA) announced C$190mm acquisition of upstream and midstream assets from Shell (press release)


  • Kinder Morgan (KMI) won Texas court challenge, removing obstacle to $2bn Permian Highway Pipeline, which will have 2bcf/d of capacity when it comes online (Rueters)