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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

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Week Thoughts: Midstream Marches Higher

The broad market crapped out Friday after rallying Thursday on perceived Fed support, but midstream outperformed on the day and the week.  Oil price strength, a 15 bps drop in the US 10-year rate, and another positive private equity data point supported midstream this week.  MLPs made up some ground on the broad midstream index (AMNA), which was dragged down by weaker Canadian stocks, but U.S. corporations and the AMUS kept pace.

Midstream beat the broad equity market and utilities. Oil prices were strong most of the week, breaking through $60/bbl briefly Thursday.  

I’ve written at length over the last week on key midstream themes and things I’ve heard recently on the road, including:

  • Oil price correlation and Midstream’s path to outperformance if oil holds above $50/bbl from here in last week’s post (Week Thoughts: Growing Acceptance Rate)
  • A mid-week post that covered the disparity in gas pipeline exposure between MLP-only indexes (and the passive vehicles they follow) and broader midstream indexes, especially after the deals announced since FERC policy announcement a year ago (Under-Piped: Holes in Your MLP Exposure)

As such, I don’t have quite as many clever things to say in the weekly post.  The next week will determine how we finish March, but midstream appears to be gaining the market’s confidence with each passing week, setting up the potential for the sector to act more defensively on the margin if the market struggles to find its footing in the near-term.

Winners & Losers

SRLP led all MLPs this week, as apparently there is renewed faith in the current 14.9% yield.  No real news among any of the other top performers. In the bottom 5, ENBL was under pressure due to the block trade Thursday night that cleared out Arclight.

TOO repeated in the top 5, SMLP rebounded from its last place spot a week ago.  On the YTD leaderboard, OMP replaces NBLX in the top 5.  Each of the top 5 is up 30%+ and only 4 MLPs are negative for the year. HEP replaced SMLP in the bottom 5.

Midstream Corporations

WMB’s latest joint venture and de-leveraging efforts was well-received by the market, and WMB led all US corps this week.  KMI was notable underperformer for a second week in a row. Profit taking and analyst downgrades likely to blame there.

TGE and AMGP (or AM now that the deal has closed) both repeated among the top 5. On the YTD leaderboard, WMB took over the overall lead from KMI. ENLC joins those two with 30%+ returns YTD. Only one midstream corporation is negative for the year (ALTM), and Cheniere is in the bottom 5 with a 14% return.

Canadian Midstream

Canadian midstream traded in a tight range as usual, with the exception of Keyera, which dropped 2.8% Friday and was well off the pace of the rest of the group on no news this week.  Canada in general created its own positive news when Alberta announced a relaxing of production limits over the next two months.  On average, Canada underperformed U.S. midstream this week.

TRP took over the top spot in Canada this week, ENB closed the week with a 20%+ return for the year, making it 5 Canadian midstream companies out of 7 with 20%+ returns YTD.

News of the (Midstream) World

For a second straight week, we have $1bn+ M&A in the Marcellus.  This time it was WMB consolidating partially-owned assets and bringing in one of the biggest and most experienced infrastructure investors in North America at an attractive multiple.  Positive data point for the public vs. private valuation gap theme.

Capital Markets

  • Arclight sold remaining stake in ENBL in a block trade of 25.0mm units at $14.00/unit
    • Discount of 4.7% vs. prior closing price, traded up 1.5% from pricing in a negative tape for MLPs
    • Original block size was 10mm units, but demand supported the upsize to the full ArcLight position

Growth Projects / M&A

  • Williams Companies (WMB) and Canada Pension Plan Investment Board (CPPIB) entered into a $3.8bn strategic JV that will include WMB’s Ohio Valley Midstream system and Utica East Ohio Midstream system (press release)
    • WMB purchased the remaining 38% stake in Utica East from Momentum Midstream for an implied $740mm
    • WMB will sell a 35% interest in the JV to CPPIB for $1.34bn resulting in net cash proceeds of $600mm for WMB after acquiring the remaining interest in Utica East
    • Both the sale and acquisition by WMB are an estimated 14-16x EBITDA
  • American Midstream (AMID) announced a definitive agreement and plan of merger with ArcLight Energy Partners (press release)
    • ArcLight will acquire all outstanding common units not already held at $5.25/unit, a 31% premium to prior day close
    • ArcLight already owns 51% of voting power and delivered a written consent approving the merger
    • AMID will no longer be publicly trade after merger closes


  • Alberta announced eased production restrictions, raising limit by 25,000 bbls/d in May and another 25,000 bbls/d in June (Reuters)