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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Viewed 3513 times

Week Thoughts: Midstream Rally Secured

Midstream traded up for a 6th straight week, with MLPs again out front with a 2.2% total return.  The MLP Index’s YTD total return is now nearly 12% after being negative less than a month ago.  The broad market struggled a bit, and midstream was a safe place to hide on Friday when the broad market sold off on Turkey’s currency plunge.

The return of MLPs has been the result of an overwhelmingly positive season of quarterly results, a large pending index rebalance, and a major simplification.  Those catalysts have all now played through, culminating in WPZ’s last day as an MLP.  It would make sense for the market to take a breather and for the consecutive weekly gains streak to pause and reflect on where we go from here.

Future positive catalysts remain in smaller simplifications, potentially M&A, next quarter’s earnings.  Private markets continue to place high value on midstream assets, as highlighted in the OXY divestiture announced this week.  Public markets are catching up.

Longer-term, it’s important that the midstream sector not squander this latest rally by remaining disciplined with their capital, in both deploying it and returning it to shareholders.  Midstream management teams need to keep their cool.  If the entire midstream sector is self-funding, there is a potential dark side of overspending or reaching for projects, because that traditional check-in with the market that external funding required no longer exists, if it ever really did.

Midstream has been given another chance, and if the sector responds like washed up baseball player Kenny Powers in the HBO series Eastbound & Down, history could repeat itself.  Kenny gets another shot at playing pro baseball and acts like he’s still a major league superstar (and a total jerk), and – surprise! – it doesn’t end well.

But for now, midstream is poised to bask in the glory of its recent success, and some of us will be doing so at an industry conference in Las Vegas this week.

Colorado Issue – I Like Money

The Colorado offset issue has returned, threatening to throw some cold water on the recent midstream party.  A petition was submitted with signatures threatening to get initiative 97 on the state’s ballot in November election, which would increase the minimum setback for oil and gas development, including fracking, to 2,500 feet from 500 feet.  If the initiative makes the ballot (which it may not) and if it passed (which it may not), oil and gas development in Colorado could be decimated.

According to the Rocky Mountain Energy Forum, the oil & gas industry in Colorado accounts for 9.1% of the state’s GDP, or more than $25bn, supporting more than 200,000 jobs and providing more than $3bn in total government revenue.

It seems irrational that a state would want to disrupt such a major part of its economy.  It also seems irrational that the U.S. would engage in a global trade war that threatens to disrupt the global economy.  But here we are.

The Colorado issue received publicity early in the week and seemed to impact midstream trading, most notably in NBLX’s stock price.  Many MLPs and midstream companies have assets in Colorado that would be impacted to varying degrees by such an initiative.  My non-exhaustive list of midstream companies with exposure to Colorado production:

  • Meaningful exposure: NBLX, WES/WGP, DCP, SEMG, NGL
  • Less meaningful exposure: WMB, PAA, TGE, MMP, ANDX, KMI, EPD, OKE

While NBLX seemed to be the primary MLP impacted by the news this week, if the initiative gained traction, it will impact a larger group of midstream companies.  It’s still very early.  It’s probably not worth worrying much about at this point, but it is worth monitoring.  Prior attempts at similar legislation have failed in the past, and well-funded energy interests in Colorado will do their best to quell this latest attempt.

Winners & Losers

MLPs were mostly higher this week, and the top 5 was all MLPs with 10%+ gains, including OMP and BSM, which both posted strong results this week.  ETP, TLP and SRLP likewise reported strong results, but each traded down on the week.  ENBL was impacted by a big block trade from a major holder.  NBLX seemed to be the stock of choice to reflect a negative view on Colorado ballot initiatives that might reduce outlook for Colorado production, down 8.9%.

CCLP went from bottom 5 to the very top this week.  ETP went from the best performer last week to near the bottom this week.  On the YTD leaderboard, CEQP broke through 50% this week, and OMP jumped up into the top 5, pushing DCP out of the top 5.  On the bottom 5 leaderboard, GMLP replaced EQM in the bottom 5 this week, not much else changed.

General Partners and Midstream Corporations

GPs and Midstream corporations were positive and the median return this week matched that of the MLP Index.  PAGP’s strong results helped it take the top spot.  TRGP, LNG, ETE and SEMG also reported this week and saw mixed results afterwards.

Back to back 6% weeks for PAGP has narrowed the YTD gap with OKE.  In the bottom of the group, TGE turned positive for the year and AMGP is nearly flat after a strong week.

Canadian Midstream

Canada underperformed U.S. midstream again this week.  Pembina saw little follow through from its stellar results last week. IPL sold off hard Friday after reporting results.  Keyera (KEY) and Gibson (GEI) both traded well following release of their respective quarterly results.

For GEI it was a second week at the top of the Canadian group, and its rally vaulted it into 2nd on the YTD leaderboard.  The big move came at the bottom of the leaderboard, where ENB finally moved out of the cellar, jumping ahead of Inter Pipeline (IPL) and TRP after a solid relative week.

News of the (Midstream) World

Signs of life this week in the business of forming new midstream companies with an IPO and a big SPAC deal.  Also, projects are being supported by customer commitments and midstream companies continue to find new capital projects, eager to spend that self-made, self-funded cash.  Finally, OXY sold assets at attractive multiples relative to current midstream valuations.

Capital Markets

  • Rattler Midstream Partners (RTLR) a 1099-producing MLP formed by Diamondback Energy (FANG), filed initial registration statement for IPO of up to $100mm (filing)
    • RTLR will not have any IDRs, and will be taxed as a corporation
    • RTLR’s lack of IDRs signals that bankers are adjusting to the new capital markets reality where investors do care about IDRs at IPO
    • RTLR’s decision to be taxed as a corporation is an attempt to be available to both MLP and non-MLP investors, because RTLR would be eligible for inclusion in MLP indexes and will be able to be purchased by investors who do not want K-1s
    • Expect this IPO to be watched closely by many private equity sponsors of recently-acquired midstream assets to see if a viable exit is available via the capital markets
    • Rattler owns, operates, develops, and acquires midstream infrastructure assets in the Permian and provides crude oil, natural gas, and water-related midstream services to FANG under long-term, fixed-fee contracts
  • An owner of Enable Midstream (ENBL) executed a block trade on Wednesday night, selling 10mm of its shares
    • Large holders of MLP units looking for liquidity to exit have timed secondary sales around big index rebalances lately, which makes sense for stocks like ENBL with limited float and expected buying pressure on the re-balance
  • Western Gas Partners (WES) priced $750mm of Senior notes (press release), including:
    • $400mm of 4.75% notes due 2028
    • $350mm of 5.50% notes due 2048

Growth Projects / M&A

  • Williams Companies (WMB) announced shareholder approval for the rollup of Williams Partners (WPZ)
    • The merger is expected to close on August 10 with each WPZ unit being exchanged for 1.494 shares of WMB (press release)
  • Apache (APA) and Kayne Anderson Acquisition Corp (KAAC) announced an agreement to create Altus Midstream Company, a publicly-traded midstream company (press release)
    • APA will contribute its gathering, processing, and transportation assets at Alpine High to Altus
    • Altus will be structured as a C-Corp with no IDRs and will own options on equity participation in five natural gas, NGL, and crude oil pipeline projects from the Permian Basin to points along the Texas Gulf Coast
    • Altus assets include rich-gas processing plants with inlet capacity of 380 MMcf/d, lean-gas treating and compression plants with inlet capacity of 400 MMcf/d, 123 miles of gathering pipelines, and 55 miles of processed gas pipelines with three market connections
    • Altus will have an estimated market cap of $3.5bn assuming 354.4mm common shares at $10/share
    • APA will receive 251.9mm shares and own 71.1% and KAAC will contribute approximately $952mm in cash at formation
    • APA will have the ability to earn an additional 37.5mm shares if certain share price and operational thresholds are met over the next five years
  • Kinder Morgan (KMI), Apache (APA), and EagleClaw announced that Exxon (XOM) has signed a letter of intent to support the proposed $2bn Permian Highway Pipeline project, a joint development previously announced in June (press release)
    • XOM may contract up to 450,000 Dth/d of capacity
    • KMI and EagleClaw are the initial partners each with a 50% ownership in the project with APA having the option to acquire equity from them
    • APA and EagleClaw each are planning to commit 500,000 Dth/d
  • Occidental Petroleum (OXY) announced $2.6bn worth of midstream divestitures, including:
    • Sale of Centurion oil gathering and long-haul pipeline and a southeast New Mexico oil gathering system to Lotus Midstream (press release)
    • Sale of Ingleside oil terminal to Moda Midstream (press release)
    • The combined purchase price of $2.6bn for both sales and $180mm in 2017 EBITDA implies 14.4x 2017 EBITDA multiple
  • Summit Midstream (SMLP) announced binding open season for Double E natural gas pipeline which has a target in service date of Q2 2021 (press release)
    • Double E will provide transportation service from the northern Delaware Basin to the Waha Hub
  • With earnings, Andeavor Logistics (ANDX) announced $150mm of capital expenditures related to recently acquired drop-down assets, specifically to expand Conan Crude Oil Gathering System and to complete Los Angeles Refinery Interconnect Pipeline (press release)
  • With earnings, Plains All American (PAA) increased capex by $650mm for mostly Permian intra-basin investments to further de-bottleneck the region (press release)

Other

  • EQT Corp (EQT) announced current CFO, Robert McNally, will become president and CEO upon completion of the company’s midstream business separation (press release)
    • Current interim CEO, David Porges, will step down from the EQT board and become chairman of the board for Equitrans Midstream Corporation, the anticipated new publicly traded midstream company
    • Thomas Karam will become president and CEO of Equitrans following the spin of EQT Midstream (EQM) and EQT GP (EQGP) from EQT
  • FERC ruled that the New York State Department of Environmental of Conservation waived its right to review National Fuel Gas’ (NFG) Northern Access Project application by failing to act within a year of receiving it (press release)
  • Alerian announced special rebalance associated with WMB/WPZ merger that will see WPZ removed from AMZ and AMZI indexes (press release)