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REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Relieves Itself

Midstream and MLPs ripped this week, continuing the rebound that began in the middle of last week.  A benign broad market backdrop allowed midstream stocks and MLPs to rally on their own merits this week.  The MLP Index returned to positive territory YTD and picked up some ground on the broader AMNA index.

It was not a surprise to see MLPs up sharply on their first positive week in 3 months.  The 4.5% gain for MLPs was their best since the middle of February and third best week of the year.  AMNA traded up 3.1%, its best week since the final week of August and 5th best week in 2019. 

The steady decline for MLPs since September put the group at oversold levels, so as noted last week it was just a matter of time before there was some relief.  The catalysts this week included:

  • Some small cap gathering & processing short covering after some news
    • AM/AR announcement Monday with readthroughs to other producer/MLP relationships
    • DVN/Dow announcement Tuesday that sent ENLC higher
  • Large project consolidation (ENB/EPD VLCC project) signaling capital discipline
  • Discussion of potential corporate coversion from EPD,
  • More insider buying at EPD
  • Lower capex guidance from ET Thursday

It was good to see these actions being taken by the big midstream operators.  It was even better to see the market react positively to it.  As discussed last week, the market’s focus appears to have been on what’s wrong with these businesses rather than a more optimistic view, which is understandable after so many disappointments.

January – Always Double Down?

It’s easy for the sector indexes to move higher when EPD (+5%) and ET (+10%) are moving higher, but for most of this year, their stock prices have been overwhelmed by negative fund flows. 

Tax loss selling season is over.  History would point to a strong January effect for MLPs and midstream stocks.  But this year feels different.  Institutional MLP allocations have been in motion all year, but they tend to move slowly and we don’t think they’re done.   

In years past, there were institutions ready to tactically allocate additional fresh funds towards the MLP sector after an underperforming year.  Ready to double down, confident in discounted valuations and in what their active managers or consultants were telling them. 

Lately, these same institutional investors are seeking new opinions from more objective sources on what to do with legacy midstream allocations.  From those conversations, we don’t get the impression there is pent up demand to buy MLPs in January.  On the contrary, it feels more like they are eager for an opportunity to gracefully exit this group of stocks that was once a viable standalone sector. 

When suggesting alternative solutions, we do hear from institutions that they believe MLPs to be “very cheap”, but that’s in the context of not wanting to sell at the bottom, rather than excitement about buying more.  All of the above “color” is to say, we would not be surprised to see a more muted January effect than what we have seen in recent years.

It reminds me of a scene in the 1996 film Swingers.  Downtrodden Mike (Jon Favreau and his fast-talking buddy Trent (Vince Vaughn) head to Las Vegas where Mike loses most of his money at a high stakes blackjack table because he doubles down and loses. Afterwards, at the low stakes table, they have the following exchange:

Trent: “You always double down on 11. Always.”

Mike: “Obviously not always.”

Trent: “Always, baby.”

Mike: “I’m just saying, in this particular case…”

Winners & Losers

MLPs

NBLX and SMLP led MLPs this week, in a strong week for gathering & processing MLPs.  Reduced capex expectation proved to be a catalyst for ET this week.  On the downside, NS has been a safe haven within MLPs and has been rewarded for being boring all year (and for being similar to BPL, which was bought out), so it feels like it was used as a source of funds to rotate into higher beta names.

SMLP went from bottom 5 last week to top performer this week, GMLP repeated in the bottom 5.  On YTD leaderboard, NS dropped off the pace going from top overall performer last week to 5th place this week.  TGP, PSXP and USAC in the best position to finish with the top spot 11 trading days from now.

 

Midstream Corporations

Huge moves in this group among names that have been the worst performers year to date.  AM’s announcement sparked hope in other similar names like ETRN and ALTM, which perhaps could employ similar tactics in renegotiations with their main customer.  ENLC traded well on the AM news as well, but also benefited from the announcement by Dow and Devon on Tuesday related to development plans on acreage dedicated to ENLC in Oklahoma. 

Despite progress on China that included specific discussion of LNG purchases, the primary LNG export company operating facilities today, Cheniere, was a laggard this week.  Not having a yield in a week when the market seemed to be bidding up names with double digit yields en masse may have been a factor. 

On the YTD leaderboard for this group, TRGP is back in double digit positive total return territory and OKE is holding its overall lead on KMI.  In the category of “it’s just math”, even after a 30% gain this week, AM total return YTD remains -42%, including dividends.

Canadian Midstream

Keyera hosted its first ever analyst day this week, and despite breaking no news at the event, the market’s reaction to it was very positive.  The rest of the group’s performance was tightly bunched.

GEI and ENB went from outperformers last week to underperformers this week, but not by much.  On the YTD leaderboard, Pembina is back above 25% total return in USD for the year, and Keyera is back above 40%.  The biggest names underperformed, which you’d expect in a sort of junk rally we saw across midstream.

News of the (Midstream) World

Some contract announcements made news and moved the market this week.  Project consolidation early in the week also welcome news.  And EPD insider buying continues, stay tuned on that one.

Capital Markets

  • None.

Growth Projects / M&A 

  • Antero Midstream (AM) announced agreements with Antero Resources (AR) which includes AM repurchasing $100mm of AM shares from AR and fee reductions contingent upon low pressure gathering volume growth (press release)
    • The share repurchases will save AM over $20mm in total dividends
    • AM announced a 22% 2020 capex reduction along with the announcement
  • Enbridge (ENB-CA) and Enterprise Products (EPD) announced a JV to develop and market a deep-water offshore crude oil export terminal capable of fully loading Very Large Crude Carriers (press release)
    • ENB-CA will have an option to purchase an ownership interest in EPD’s Sea Port Oil Terminal
    • ENB-CA also announced that it will advance the development of a new wholly-owned Jones Creek Crude Oil Storage Terminal
  • Genesis Energy (GEL) and Murphy Exploration entered deepwater Gulf of Mexico transportation agreements (press release)

Other

  • Enterprise Products (EPD) Chairman Randa Williams purchased $16.7mm worth of EPD stock this week, after large purchases last week
  • Summit Midstream Partners (SMLP) announced departure of Brad Graves, Chief Commercial Officer (filing)