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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

Week Thoughts: Midstream Follow Through? Nah Fam

MLPs and midstream corporations underperformed the market this week.  Midstream stocks traded down each of the 4 trading days in what was the worst week for the AMNA and AMZ in more than two months.  AMNA’s YTD returns are still well ahead of the market overall, but the S&P 500 has caught and passed the MLP-only AMZ. 

Oil prices weren’t the culprit this week, with oil prices closing the week above $64/bbl, flat vs. last week.  Income-oriented equities like REITs and utilities traded poorly this week, which when combined with limited enthusiasm around KMI’s results, may have led to midstream weakness.

In non-midstream MLP news, Blackstone Group became the latest MLP to convert to corporation, which you can read more about in the news section below.  Otherwise, it was a quiet week for midstream overall.  The market’s euphoria and interest in energy stocks appears to have passed for now, leaving the midstream sector with earnings the next few weeks as the next catalyst to attract investor interest.

On the Next…KMI Press Release

KMI’s results were a non-event, posting consistent results, but failing to generate much enthusiasm after the strong price action to start the year and absent a major announcement on Kinder Morgan Canada.

KMI Management did indicate that resolution on KML would be coming “in the coming weeks”. Other times in my life when I’ve heard things like “a couple weeks” in regards to something being complete, its coming from contractors working in my house and I’m generally disappointed.  But management seemed confident, so stay tuned for something ahead of the big Midstream / MLP conference in May.

Probably the most interesting part of the week was a fun discussion on Twitter among those trying to figure out if KMI’s CEO Steven Kean used the word “fam” on KMI’s earnings call in response to a question on oil prices: “Oil price always matters, fam” is possibly what he said (hat tip to @kylerhasson for starting the discussion”). 

KMI and other midstream corporation outperformance to date has been chalked up to an increase in generalist investors by many observers.  Anecdotally, I would argue much of the gains have been from a shift in exposure among existing long-only MLP/midstream asset managers as MLP options and liquidity have dwindled.  In other words, I think its still mostly existing midstream “fam” that’s participated this year. 

If true, maybe that’s bullish in that there’s still a chance for truly new “generalists” to get excited about midstream stocks.  Or maybe its bearish that more of them haven’t already allocated to the group after a long period of healing and underperformance across the sector.

Tax Day Blues

You’d think investors would tend to curse MLPs around tax time, given the complexities K-1s for publicly-traded partnerships can cause, and maybe sell them in frustration around tax due dates.  But the opposite is true, MLPs historically have traded exceptionally well on tax due date weeks. 

This week’s negative price action was just the 5th time in the last 24 years that MLPs were negative during the week that taxes were due.  That’s a hit rate of 79% vs. the overall hit rate of 59% (714 positive out of 1216 weeks since beginning of 1996).

Winners & Losers

USAC led all MLPs this week, as steady buying from last week continued this week ahead of a distribution announcement. Even after it’s nearly 40% return YTD, USAC still yields 12%. HEP and it’s 58th consecutive distribution increase announcement this week, also outperformed. In the bottom 5, no news to report, but the market sold MMLP and GLOP hard.

Every one of last week’s top 5 traded down this week (except USAC). WES avoided the bottom 5 but traded down 4.4% nonetheless, showing very little follow through from last Friday’s huge move. On the YTD leaderboard, no changes at the very top, although NS and SRLP were replaced by CAPL and USAC. SMLP took over the bottom spot out of all MLPs as it struggles to recover from the IDR takeout and simultaneous distribution cut.

Midstream Corporations

U.S. midstream corporations underperformed MLPs as a group this week, with median returns of -3.4%, although a weighted average view of returns would put the group inline, given that WMB, OKE and KMI were traded slightly better than the group, and some of the smallest names like ALTM and SEMG traded worst.

On the YTD leaderboard, there is still just a single negative total return in the group (the raging dumpster fire that is ALTM).  The group at the top kept their order, but now just 2 names have 30%+ returns.

Canadian Midstream

Canadian Midstream outperformed U.S. corporations and MLPs this week. The Alberta election results skewed positive for the energy sector in Canada, but the market didn’t get too excited about it, given the energy sector is being held hostage by ongoing pipeline egress difficulties in other provinces in Canada and in U.S. courts.

KML underperformed the group, as it has all year.  This week offered no resolution to KMI’s future plans regarding the entity that went public less than 2 years ago.

News of the (Midstream) World

The preferred equity market remains open to MLPs seeking to avoid issuing straight common equity, and ET took advantage this week.  In addition, another non-midstream MLP announced plans to convert to a corporation and the market loved it, but this time it was a massive financial MLP with a $40bn+ market cap and not a small cap. royalty MLP.

Capital Markets

  • Energy Transfer (ET) priced a public offering of $700mm of 7.600% redeemable perpetual preferred units at $25.00/unit (press release)
    • After the first five years, units will accumulate at a percentage of the $25 liquidation preference equal to an annual floating rate of the three-month LIBOR plus a spread of 5.161%
    • Proceeds will be used to reduce credit facility borrowings
  • Natural Resource Partners (NRP) priced an upsized private offering of $300mm of 9.125% Senior notes due 2025 (press release)

Growth Projects / M&A

  • Concho Resources (CXO) and Frontier Midstream Solutions announced a JV to create Beta Crude Connector, a gathering and transportation system in the Northern Midland Basin (press release)
    • The JV will consist of a 100-mile gathering system, 250,000 barrels of crude oil storage, and a pipeline system with an initial capacity of 150,000 bpd
  • Tellurian (TELL) announced that its Driftwood LNG export facility development has received Authorization from FERC (press release)
  • TransCanada (TRP) announced binding open season for Marketlink oil pipeline service from Cushing, OK to markets on the Gulf Coast (press release)
  • Shell Midstream (SHLX) announced binding open season for Zydeco Pipeline service from Houston and Nederland, TX to St. James and Clovelly, LA (press release)

Other

  • Blackstone Group, LP (BX), the largest financial MLP, announced plan to convert from K-1 issuing partnership to corporation (press release)
    • BX stock price surged 7.5% the day of the announcement, which also included quarterly results

Dividend / Distribution Announcements

  • KMI – $0.25, +25% quarter over quarter, +25% year over year
  • CNXM: $0.3732, +3.6% qoq, +15.0% yoy
  • ENLC: $0.279, +1.5% qoq, +6.1% yoy
  • PSXP $0.845, +1.2% qoq, +18.3% yoy
  • OKE: $0.865, +0.6% qoq, +8.9% yoy
  • HEP: $0.67, +0.4% qoq, +2.3% yoy
  • Flat qoq and yoy: CEQP, USAC, TRGP, GPP
  • CCLP: $0.01, flat qoq, -94.7% yoy