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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Pumped, Market Dumped

Midstream indexes followed the S&P 500 lower this week, but MLPs outperformed factoring in distribution ex-dates from this week.  Midstream also did better than broader energy stocks (XLE -6.5%) and are holding on to small YTD gains despite two straight negative weeks, well ahead of the S&P 500.  Utilities and infrastructure stocks outperformed MLPs this week.

Midstream stocks ticked up Monday, then traded down each of the next four days this week.  Further regulatory and policy concerns impacted a few select names, but with commodity prices stable and no material transactions in the sector, the negative action this week can probably be chalked up to a risk-off week in the market. 

One of the wildest weeks in recent memory for a few small stocks who shall not be named.  It feels good to have moved on from 100% politics in the news to some stock market discussion, but when local news and Instagram models are talking about a single stock, you probably don’t need to hear more about it from me.

Trading desk “color” from many Wall Street banks this week cited degrossing as a major factor.  Degrossing essentially means reducing bets on both sides, which means closing out shorts and selling the paired long positions and taking overall exposure down. 

In the energy space, it makes sense that short sellers would want to reduce exposure to the risk of a big squeeze in energy stocks, even though it feels like the big squeezes already happened on the vaccine news and the midstream sector has seen “degrossing” for several years running.

Status Update: Four in a Row!

MLPs finished January with total return of 5.8%, the third best January in 12 years.  It was a fourth positive month in a row for MLPs, something that has happened frequently in the history of MLPs but not recently (last time was Dec 2018 to March 2019). 

While the month ended with a few negative weeks, it was better than average for January returns over the years.  Return for the AMZ since late September bottom is +43%, which doesn’t seem like a ton in the context of some of the other wild moves in the market, but it has been a big move higher.

February has typically been a weaker month based on historical returns, most notably in two of the last three years when February was double-digit negative. 

AMNA Status Update: Catching Up

The broader midstream sector also had a strong month, catching up to MLPs in the closing weeks of the month to finish +5% too.  Midstream has also put together a four month streak of positive returns, and also has struggled historically in February, but with less volatility than MLPs on their own.

With distribution ex-dates on still high yields for some MLPs, I would not be surprised to see relative outperformance of AMNA in February, especially if the risk-off sentiment of this week were to continue.

Winners & Losers

MLPs

Small-cap, downstream-oriented names were the winners this week, with names like WLKP, GLP and SRLP setting the pace this week.  The downside included PSXP, which reported results Friday and is under pressure related to its exposure to the Dakota Access Pipeline.  USAC was down after passing through its ex-date on its juicy yield.

GEL went from bottom 5 last week to top 5 this week, NGL went the other way.  PAA landed in the bottom 5 for a second straight week.  YTD, BSM took the top spot after another positive week, helped by strength in commodity prices.  GLP’s big distribution increase announcement helped it jump into the second overall spot.  SRLP joined the top 5 as well, replacing NBLX.  On the other side, PSXP took the bottom spot in the group from WLKP, and ET joined the bottom 5 after a volatile week and ongoing DAPL uncertainty.

Midstream Corporations

U.S. midstream corporations had a wide range this week, but all finished lower.  Smaller stocks with upstream-facing natural gas assets (AM, ENLC, ALTM) fared better than liquids names like PAGP and OKE.  Kinder Morgan gave back most of its YTD outperformance despite an analyst day with nothing negative announced.  WMB was the best performing big cap name this week. 

PAGP, ETRN repeated near the bottom of the group and appear to be the market’s preferred way to play political / regulatory risk in the midstream space.  No repeats in the top 5 this week.  On the YTD leaderboard, KMI and PAGP relinquished their sector lead from last week.  OKE held up and is in third place, overtaken by ENLC and HESM.  ETRN separated itself from the group on the downside this week, down more than 15% already this year.

Canadian Midstream

Every name in Canadian Midstream was negative this week, with less volatility for the biggest ones.  GEI continues to underperform peers, finishing at the bottom of the group again.  There was no stock-specific news in Canada this week, but general energy stock malaise traveled to Canada.

ENB led the group after underperforming last week.  Pembina was down this week, but is holding its double-digit gains YTD, out in front.  Not much of a range outside of Pembina on top and Gibson on the bottom.

News of the (Midstream) World

Small-scale M&A action this week, but nothing major.  Distribution announcements are almost finished, and the very long earnings season is underway, but limited company-specific news flow again.

Capital Markets

  • NGL Energy (NGL) priced $2.05bn offering of senior secured notes due 2026 (press release)

Growth Projects / M&A

  • Tetra Technologies (TTI) announced sale of its general partner interest in CSI Compressco LP (CCLP) and related assets for $30.7mm to Spartan Energy Partners (press release)
    • Spartan to acquire G.P., IDRs and 10.95mm common units for $13.95mm
    • TTI is also selling 15 large compressor units for $14.2mm, subject to lease arrangements with CCLP
  • Capital Products Partners (CPLP) announced acquisition of three 5,100 TEU container vessels with five year agreements for a total of $40.5mm (press release)
  • Green Plains Partners (GPP) announced sale of ethanol storage assets to Green Plains Ord LLC for $27mm (press release)

Policy / Regulation

  • DAPL: D.C. Court of Appeals affirmed the District Court’s decisision to vacate the easement Dakota Access Pipeline has been operating under and affirmed order for U.S. Army Corp of Engineers to conduct and Environmental Impact Statement
    • There is a hearing set for 2/10/21 where the USACE should decide whether DAPL will be shut down
    • If the pipe were shut down, that shut down would likely last more than a year while the EIS is completed

Distribution Announcements

  • 17 more dividend and distribution announcements this week, bringing the total to around 40 names announced so far.
    • There were a few increases this week, including a 10% raise by GLP.