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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Re-Run

Energy stocks, midstream stocks, and MLPs ran back last week’s action with another big week.  Like last week, it was 4 straight green days followed by a weaker Friday.  Oil and NGL prices were positive on the week, which helped, but midstream continues to be helped by the rotation (however brief it’s been) into smaller, value stocks.

Midstream YTD return is way out in front of the S&P 500.  Earnings season kicks off with KMI this week.   Given the 2021 guidance announcement last month and the analyst day next week, KMI earnings should be pretty sleepy this week. 

4Q results for midstream overall should be accompanied by commentary that echoes what we’ve been hearing from management teams in recent quarters.  Management will speak to reduced capital spending and reduced operating expenses leading to free cash flow, to reduced leverage and eventually to buybacks.  M&A will be talked down. 

Investors will want to know:

  • How sustainable the opex savings are?
  • How much more opportunity to cut costs there is?
  • Where in the value chain are there any bottlenecks that might lead to high margins and eventually to the need for more infrastructure?
  • How much outlook may have changed or could change given the rebound in commodity prices.
  • Impact of the recent commodity price spikes on producer spending plans.
  • Changes to leverage targets or buyback plans.
  • Impact of the election on sentiment towards corporate conversion.
  • Impact of the election on the ability to develop new infrastructure.
  • Opportunities to participate in the energy transition.

Most importantly, investors will want to see stability and discipline with strategic direction in the face of commodity price and stock price strength, as discussed last week. 

Like I said, this week was basically a re-run, which is fitting given the bizarre new show WandaVision released on Disney+ this week that captures the essence of the old sitcom re-runs I used to click past on Nickelodeon as a kid with a series of classic TV tropes.

Winners & Losers

MLPs

Not quite a table win for MLPs this week, there were some huge winners again, but also a few stocks that traded down.  Gathering & processing names with potential NGL upside like DCP or potential stability from commodity prices driving lower declines in production like ENBL, OMP, and CEQP.  USAC announced another flat distribution and ended the week with a 13% yield.

OMP repeated in the top 5 this week and holds the overall YTD lead in midstream after 2 weeks.  CEQP went from bottom 5 to top 5.  Each of the top 5 YTD is up 20%+ already.  WLKP and CAPL repeated in the bottom 5 as the trend downstream-oriented MLPs underperforming early in 2021.  WLKP is the only negative stock in the MLP / midstream universe.

Midstream Corporations

ETRN bounced back this week after a slow start last week.  Bakken names HESM and OKE were strong, likely on better outlook for the Bakken at $50+ oil and strong NGL prices.  TRGP and LNG were notable weaker performers this week, taking a pause after conferences this week may have poured some cold water on the enthusiasm for upsized margins from higher NGL and LNG prices.

ETRN went from worst to first week over week.  TRGP and LNG as noted went from top 5 to bottom 5 in this group.  OKE and HESM went from laggards to leaders.  On the YTD big board, the top 5 of this group has had quite the bounce to start the year that MLPs have had, with only 2 stocks up 15%+ so far.  But even the underperformers like LNG and AM are up 10%+.

Canadian Midstream

Canada has also not had the same surge that MLPs have had, but every stock in this group was up again this week.  ENB led the group after a slow start last week.  The market seemed to find those names across midstream that were weaker to start and bid them up this week in the search for upside after the strong open to 2021.

More tightly bunched returns in Canada this week vs. last week.  Big cap names ENB and TRP outperformed within Canada, while strong starters PPL and IPL lagged (slightly).  YTD, the more upstream-oriented players like Pembina, Keyera and Inter Pipeline have outperformed early, benefitting from strength in NGL and oil prices.  Gibson is the clear (relative) loser so far this year at only +3.7% YTD, likely the victim of rotation among small cap names.

News of the (Midstream) World

Slow start to the news cycle for midstream this year.  The long tail of small-cap MLPs continues to clean itself up slowly, this week GMLP announced it would be put out of its misery with a takeout.

Capital Markets

  • Crestwood Equity (CEQP) announced results of tender offer for 6.25% senior notes due 2023 (press release)
    • 58% of outstanding notes were validly tendered

Growth Projects / M&A

  • Golar LNG Partners (GMLP) announced it will be acquired by New Fortress Energy (press release)
    • All-cash transaction for $3.55/unit, a 27% premium to prior day closing price
    • Stock traded up 22.6% on Wednesday
    • GMLP went public in April 2011 in a $310mm IPO at $22.50/unit and reached its all-time high of $39/unit in September 2014
  • Summit Midstream (SMLP) announced achievement of key milestones for the Double E Pipeline, including receipt of the notice to proceed from FERC (press release)
    • Traded up 28% Wednesday, but still carries a market cap well below $100mm

Other

  • Enbridge (ENB) responded to Michigan’s attempts to terminate easement for Line 5 dual pipelines (press release)
  • Energy Transfer (ET) announced appointment of Brad Whitehurst as CFO (press release)

Distribution Announcements

  • USAC, HMLP both announced flat distributions quarter-over-quarter and year-over-year