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:
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.
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.
Growth Projects / M&A