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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Paper Jam

After an all-time good week across the sector last week, Midstream stocks gave it all back this week.  Most of the damage came on Thursday, when the broad equity market dropped 6%.  Midstream stocks sold off even more Thursday, dragged down by an 8% decline in oil prices and $832mm in new equity from a large, unexpected marketed equity offering by OKE.  Awful timing for that offering left the sector scrambling to digest the new shares.

This week, we published an off-cycle post once again highlighting listed infrastructure as an alternative to standalone, very volatile midstream exposure.  The post was called “Infrastructure: Another Midstream Exit Opportunity”.  Click here to read more

Paper Jam

The Fed printing money to support the locked down economy has clearly been a driver of equity performance across the stock market in recent months.  The Fed chairman’s commentary Wednesday afternoon was cited as one of the reasons for the big sell-off Thursday as he flagged that the pandemic could result in permanent economic damage and extended period of unemployment. 

So, this week was a paper jam for the Fed printing press.  It was a paper jam of new midstream paper that overwhelmed the midstream sector.  

What Provoked Oneok?

The equity offering by OKE this week was the biggest equity issuance since OKE’s $1.2bn overnight offering in January 2018.  It was the biggest equity offering with a one-day marketing effort in more than 5 years.  It was hard to understand what the rationale could be for OKE to willfully tank its stock price when it appeared that ratings agencies were willing to give the company some time to fix its high leverage. 

OKE had rallied 222% from March 18 through Monday’s close, so it could be seen as simply an opportunistic issuance 115% higher than its March low (even if it priced 33% lower than Monday’s close). Another way to look at the offering is that management believes $32/share is a good price to sell equity because it is cautious on how fundamentals progress from here.  But if that were the case, it seems like a dividend cut would have been more reasonable.

Whatever the reason (or combination of reasons), this equity does reduce leverage immediately.  Also, the terrible stock price reaction should deter others from attempting a straight marketed equity offering.  But midstream investors are looking around to see if others will try to come to market next.

The 10 largest U.S. midstream companies other than OKE are:  KMI, WMB, EPD, MMP, ET, PAA, MPLX, TRGP, LNG, and PSXP. 

Poll Question: More Equity Coming?

Updated Worst Days Ever List

Thursday, we added another worst day to the top 10 list for MLPs and the AMNA.  Now, 7 of the worst 10 days ever have happened this year, and the year’s not half over.  Most of the other days on the list have been good short-term buying opportunities, with next 30-day returns positive except for one.

Updated Worst Weeks Ever

Last week, AMZ had its 4th best week ever, and this week AMZ had its 5th worst week this week.  AMNA went from 3rd best week last week to 3rd worst week. 

The next 4 weeks had been a bit more mixed than the above charts, but historically the sector has rebounded over the subsequent 4 weeks, except earlier this year when a 12% move down for AMZ was followed by a 50% decline in the next 4 weeks.

The rest of 2020, will any of the above 10 midstream stocks issue common equity in public offering?

Yes

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No

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Winners & Losers

MLPs

Three MLPs were positive this week, including ARLP at the top.  The losing side of the ledger was dominated by some of the best performing G&P and liquids focused MLPs off the bottom.  These names crapped out this week with falling oil prices and risk-off trading.

ENBL, NGL, GEL and PBFX were all in the top 5 last week and were bottom 5 this week.  EVA and SRLP were the biggest losers last week and were among the biggest winners this week.  On the YTD leaderboard, SRLP and EVA moved up to the top 2 spots.  At the other end of the scale, CEQP rejoined the bottom 5, replacing GLP.  ARLP edged out of the cellar, replaced by NBLX at -61.2%.

Midstream Corporations

HESM was the best performing non K-1 issuing midstream company this week at just -5%.  Other gas focused names like AM, KMI and LNG were also outperformers.  OKE was far and away the worst performing corporation at -25%.  Other volatile upstream-oriented players like TRGP, PAGP and ENLC were also among the losers.

HESM was the worst performer last week and best performer this week, moving counter to the market of late.  ENLC, TRGP and OKE went from top 5 last week to bottom 5 this week.  AM and RTLR repeated as outperformers.  ETRN repeated as just slightly worst performer than average.

On the YTD leaderboard, HESM is the best performer so far, replacing WMB at the top.  On the bottom 5, OKE retook the bottom spot at -52.8%.

Canadian Midstream

Canada was less volatile than the U.S. this week, like most weeks.  The biggest, most defensive names ENB, TRP outperformed.  More upstream-oriented companies Pembina, Keyera and Inter were at the bottom.

Performance this week was basically the mirror image of last week, when higher beta names outperformed, and the big boys underperformed.  In typically boring Canadian fashion, the YTD leaderboard rankings match exactly the weekly rankings, except with TRP ahead of ENB.

News of the (Midstream) World

OKE’s equity deal was a surprise.  While the equity markets appear slightly open (for a price), the debt capital markets remain wide open and supportive of midstream companies and MLPs, as evidenced by PAA.

Capital Markets

  • Oneok (OKE) priced offering of 26mm shares at $32/share, raising $832mm in gross proceeds (press release)
    • This was a one-day bookbuild, and the transaction priced at a 9.4% discount to the closing price for an overall 23.7% decline from unaffected price
    • Not encouraging for other management teams considering cashing in on recent price gains
  • Plains All American (PAA) priced $750mm of 3.80% senior notes due 2030 at 99.794% of par to yield 3.825% yield to maturity (press release)
    • Moody’s re-affirmed PAA’s rating and positive outlook with this offering, contingent on recovery in pipeline volumes

M&A / Growth Projects

  • Equitrans Midstream (ETRN) announced revised in-service date to early 2021 (from late 2020) and raised cost estimate for its interminable Mountain Valley Pipeline (MVP) project (press release)
    • Project cost could go 5% over the latest $5.4bn cost estimate
  • Blackstone Minerals (BSM) announced new incentive agreement with XTO Energy with respect to drilled but uncompleted wells (DUCs) in BSM’s Shelby Trough acreage (press release)

Other

  • Colorado Rising drops plans for several possible ballot initiatives oil & gas, including anti-fracking measures (Reuters)
  • EQM Midstream (EQM) expected to be removed from Alerian Indexes when its merger with ETRN closes next week (press release)
  • Summit Midstream (SMLP) to be removed from Alerian MLP Index in re-balance (press release)