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 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 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.
Growth Projects / M&A