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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

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Week Thoughts: Midstream Lollygags into Quarter End

Stock prices across midstream were little changed again this week, with U.S. corporations trading slightly better than MLPs and Canadian corporations. The S&P 500 beat Midstream and utilities, and Lyft is now a public company.  Oil prices oscillated around the $60/bbl figure throughout the week, but finished strong.

The Houston ship Channel resumed operations late in the week after the industrial fire and chemical spill, with the Coast Guard reporting 50% of normal activity on Friday, up from 30% on Thursday.  So, things should get back to normal on the Gulf Coast, but expect noise in the oil inventory numbers in the coming weeks. 

The next big midstream event is the EPD Analyst Day on April 10th, which is later than usual, but timely given their operations in the Houston Ship Channel.  In the past, EPD management has downplayed Corpus Christi given the connectivity advantages of the Houston Ship Channel.  But maybe another year of growth in volumes of all kinds across the docks in Houston will have convinced them an alternative is necessary.

Lollygaggers

Major League Baseball opened its season this week.  In Philadelphia, that meant getting a chance to cheer for Bryce Harper in his first games after finally signing a contract.  So far, so good for the Phillies. 

The local Little League baseball season is also underway.  I played baseball throughout my youth in Houston (Genesis Energy’s CEO Grant Sims was actually head coach of my first or second grade team).  Now in suburban Philadelphia, after a few years experimenting with lacrosse, both of my sons decided to give baseball a shot this year.

Baseball practice is just as fun now as one of the dad-coaches as I remember it when I was a kid.  Towards the end of practice, though, when we set up live game situations, there are lulls, sometimes lengthy, uncomfortable ones. 

  • For the 8-year old, who is playing “Dads-Pitch”, the lull comes when one of the kids (not my naturally gifted child, of course) can’t make contact…for like 15 straight pitches.
  • For the 10-year old, his practice stalls out when the kid pitcher can’t throw a strike…for like 15 straight pitches.

Similarly, midstream stock prices have been in a lull since the first week of March.  The post-earnings pause hasn’t been lacking for news and entertainment. We’ve had private equity joint ventures, significant M&A (EQM, WMB), progress on projects, etc.  And there has been a captivating public shaming of past midstream missteps on Twitter being orchestrated by the anonymous parody account @mr_skilling, who has made a bracket of the worst management teams of all time. 

Reliving the lows of midstream history feels like a contra-indicator for midstream performance, and hopefully it encourages better management of midstream companies in the future.

Status Update: Counting Our Capital Appreciation Blessings

MLPs closed out March with a 3.4% gain that was the third straight monthly gain for the MLP Index to start the year.  MLPs put up their biggest quarter since 2Q 2016 with 16.8% total return, good enough for 5th best quarter of all time.

Looking ahead, over the last 23 years, the MLP Index return for April has been negative in just 3 years.  It has been positive for 13 of the last 14 years (2017 was the last negative April).  It is the highest hit rate of all months, even ahead of January at 19 out of 24. 

The AMNA was the standout winner among midstream and MLP Indexes this quarter, with a massive 22.2% total return.  Much of that return came in January, but it has now been 3 straight positive months for the index, like the AMZ.

Poll Question

As noted above and over the course of the first quarter, midstream corporations (U.S. and Canadian) outperformed MLPs this in the first quarter.


Which index will perform better in 2Q 2019?

  • Alerian Midstream Energy Index (AMNA) (68%)
  • Alerian MLP Index (AMZ) (32%)

Total Voters: 120

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The question is simple, but it is really asking if you believe this quarter’s action represents a permanent shift in investor preferences away from MLPs or whether you think it was more of a short term disconnect that will correct itself longer-term.

Winners & Losers

Smaller MLPs with non-traditional assets OCIR, SRLP and EVA led the MLP group this week.  Marcellus-based G&P names CNXM and EQM were also among the winners.  On the downside, three refinery-backed MLPs were in the bottom 5 (PSXP, MPLX, HEP), while HESM and WES were the worst performers.  There was no news among any of the bottom or top 5 performers this week.

SRLP repeated in the top 5 and OCIR went from worst last week to first this week.  On the YTD leaderboard, NGL Energy finished the quarter with a 51.4% total return to lead all MLPs.  CAPL and SRLP joined the top 5, replacing OMP and HESM and leapfrogging NS in the process.  On the downside, there are now 5 MLPs with negative returns YTD, and BPMP is the new biggest loser so far this year.

Midstream Corporations

U.S. corporations outperformed MLPs this week as a group.  Only one (ALTM) was negative, but some of the best YTD performers were among the underperformers this week, including KMI, WMB and OKE.  There may have been rotation into some of the other names (e.g. ETRN, ENLC) that may have more complicated stories or questions about their prospects in perhaps a sign the market is willing to take more risk to find names with upside potential.

The market seems to be growing more confident in ETRN’s Mountain Valley Pipeline prospects, perhaps helped by the White House’s renewed focus on pipeline development late in the week.

ALTM repeated at the bottom of the group, while AM, TRGP and TGE repeated in the top 5.  On the YTD leaderboard at the quarter mark of the year, ENLC’s big gains this week put it on top, ahead of WMB and KMI, which had been battling for the top spot most of the quarter.  OKE has caught up to the group and also posted 30%+ returns.  There is just one name in the group negative for the quarter (ALTM), and ETRN’s big week helped it climb a few spots.

Canadian Midstream

Canada performance this week had a similar skew with the biggest names under-performing and the smaller, higher-risk names outperforming.  ENB underperformed, but held up relative well despite the best efforts by negative regulatory headlines from Michigan.

The largest Canadian names performed best last week, and that reversed this week.  For the YTD overall, GEI took the top spot through 1Q, but there were no real losers for the quarter, even ENB with its Line 3 delay announcement this quarter posted 18% return.

News of the (Midstream) World

Another week, another private equity investment in midstream.  In other news, this week was a little bit of a throwback with a drop-down acquisition and equity funding via PIPE announced simultaneously.  Also, signs of capital discipline were celebrated in the analyst community (but not so much in the stock price).

Capital Markets

  • NGL Energy (NGL) priced offering of 1.6mm of its 9.625% Class C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred units at $25.00/unit, raising $40mm in gross proceeds (press release)
    • NGL originally sought to sell 2.0mm units for $50mm
  • Noble Midstream (NBLX) announced $200mm preferred investment by GIP into newly-formed entity that holds NBLX’s 30% stake in the Epic crude oil pipeline (press release)
    • $100mm will be funded during 1Q (so this week), while the other $100mm will be available for a one-year period
    • The preferred equity is perpetual and has a 6.5% annual dividend rate, payable quarterly, in cash but with the ability to defer payment for the first two year following closing
  • Westlake Chemical Partners (WLKP) announced sale of 2.94mm common units at $21.40/unit in a private placement, raising $62.9mm in gross proceeds (press release)
    • Price reflects a 6% discount to the prior closing price
    • Units purchased by an entity for the benefit of certain family members of WLKP’s CEO and Chairman

Growth Projects / M&A

  • Magellan Midstream (MMP) announced reduction capital expenditure estimates for 2019 and 2020 to reflect removal of the Permian Gulf Coast Pipeline project from its backlog (filing)
    • MMP reduced capital expenditure plans by $200mm in 2019 and by $250mm in 2020
    • PGC is a JV with Energy Transfer (ET), MPLX, and Delek Holdings (DK) which will deliver crude oil from the Permian to MMP’s terminal in the Houston area and ET’s terminal in Nederland, TX
  • Kinder Morgan (KMI) announced it has dropped out of a recently proposed Gulf Coast crude export terminal JV, Texas Colt (Reuters)
    • The other JV partners, Enbridge (ENB-CA) and Oiltanking Partners, remain committed to the project
    • KMI said that the $800mm project does not align with their strategic priorities due the time commitment to move it through a regulatory phase
    • ENB said it will buy out KMI’s stake
  • Energy Transfer (ET) and Phillips 66 Partners (PSXP) announced second phase of Bayou Bridge Pipeline is complete and ready for service (press release)
    • The JV is 60% owned by ET and 40% by PSXP
  • Energy Transfer (ET) and Shell entered into a project framework agreement for further development of the Lake Charles LNG project (press release)
    • Pending an FID, the project would convert ET’s existing Lake Charles LNG import and regasification terminal to an LNG export facility with a liquefaction capacity of 16.45 Mtpa
    • Lake Charles is a 50/50 JV
  • Westlake Chemical Partners (WLKP) announced drop-down acquisition of additional 4.5% interest in Westlake Chemical Opco for $201.4mm (press release)
    • Price reflects 10.5x of the Opco’s expected 2019 EBITDA

Other

  • Crestwood Equity (CEQP) COO Heath Deneke will resign from the company to pursue other interests (filing)
    • Separation agreement included $2.8mm cash payment for severance
  • Minnesota PUC voted 4-0 not to reconsider its previous approval for Enbridge’s (ENB-CA) proposed Line 3 Replacement project (StarTribune)
  • Michigan Attorney General called law authorizing Line 5 tunnel for Enbridge (ENB) unconstitutional, then Michigan Governor called for a halt of all action on Line 5 tunnel development
    • ENB responded saying management was “surprised and disappointed” (press release)
  • Magellan Midstream (MMP) named Aaron Milford COO and Jeff Holman CFO effective May 1 (press release)
    • Milford will leave his current CFO role into the newly created COO position
    • Holman was the former treasurer and VP of Finance