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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

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Week Thoughts: Midstream Snowmaking Underway

Midstream traded up this week, but underperformed the best week for the S&P 500 in years.  Of the three main buckets of North American midstream, U.S. midstream corporations performed best, MLPs worst. Midstream also underperformed utilities.  Midstream didn’t outperform much of anything, outside of oil and NGL prices.  Powell’s not hawkish comments on Wednesday sparked a broad market rally and a decline in interest rates.

In addition to news of a potentially more accommodating Fed on Wednesday, other positive macro signals are emerging, including Russian openness to participating in a production cut with OPEC and positive rhetoric on potential de-escalation of trade war with China following President Trump’s meeting with China’s leadership over the weekend.  In energy news, Canadian oil prices and differentials got a boost after Alberta stepped up to invest in rail transportation efforts.

Next week should be busy for energy and midstream.  OPEC will meet late in the week, with chatter likely moving the market ahead of the meeting.  The Wells Fargo conference in New York will provide another opportunity for midstream companies to get the word out on the strong fundamental backdrop and the progress they have made on improving their financial situations.  Also next week, MPC will host its investor day, which will potentially provide some guidance on its go-forward plans for its multiple MLPs.

Trust the Dust Settling Process

After what seems like incessant snow globe shaking this year across midstream, with simplifications and rollups coming nearly every week (EQGP this week), some of the snow will settle in the coming weeks when the rollups of EEP and SEP close.  WPZ, ETP, TEP, BWP buyouts (among others) have closed, but several remain pending (SEP, EEP, AM, ENLK, WES, EQGP, VLP, DM, TLP).

With the exception of the expected MPLX/ANDX combination or some future LNG/CQP combination, there are no meaningful simplifications left.  There will soon be no more publicly-traded general partners. The universe of 8 such entities at the beginning of 2018 have all completed or announced simplifications (TEGP, AROC, AHGP, ETE, AMGP, ENLC, WGP, EQGP).  This is remarkable clean-up progress looking back now, even if during the process it felt very slow.

As these pending deals close, the universe and the passive money that chases that universe should see technical trading spurts around re-balances, potentially offering opportunities in other stocks that are not the focus of technical buying.  In any event, midstream should continue to be very dynamic as the snow settles and a new universe comes into view…

Snowmaking Season

A huge positive of living in the Philadelphia suburbs is proximity to ski slopes in the winter.  There are many mountains in the U.S. with better skiing than the Poconos, but for my kids (3 under 12) and my annual travel budget (undisclosed), a 90-minute drive in the family truckster is hard to beat.  We ski as much as we can in the winter and have season passes to a mountain nearby.  So far, we’ve had no major injuries, and everyone seems to enjoy it (when temps are above 15 degrees, at least).

This is the first weekend our mountain will be opened this year.  The storm a few weeks ago created just enough snow to build a base and then they use snowmaking machines from there.  There were 3 trails open this weekend, out of 20+ at full capacity.

Because my family is all-in for the season, we’re eager to kick things off and we’ll probably go a few times before the mountain is 100% operational.  We’re the die-hard crowd.  It won’t be the best ski conditions in mid-December, but we can get comfortable, get back into the groove and look forward to post-Christmas when the mountain is covered in snow and all the trails are open.

Those of us who care about midstream and who have a positive outlook on the sector are like the die-hard ski bums.  We’re there for opening day when no one else is.  We’ve passed through 3Q ex-date season and probably the bulk of tax-loss season, and we’re into snowmaking season.  We know eventually the conditions across the sector will be too good to ignore and by MLK weekend there should be crowds flocking, just not yet…

Still Here

Finally, while one energy hedge fund in Dallas closed up shop this week, citing “truly bizarre stock action in the energy sector” (Bloomberg), we remain engaged, pumping out our weekly review of the action in the midstream sector, which has also seemed “bizarre” at times this year…

Status Update: November

This Friday marked the end of another month.  November was slightly negative for the MLP Index, its third negative month in a row.  If December is flat, this quarter would rank ninth worst of all time, and not even the worst quarter of this year.  If December is flat, the full year total return would be negative for a second straight year, which has only happened once before (1998 and 1999).

Looking ahead, MLP Index average return for December is positive over the last 22 years, and December’s average return is 250 basis points higher than November.  Each of the last two years, December has produced 4%+ return for the MLP Index.

AMNA finished November slightly positive, breaking a streak of 3 straight negative months.  AMNA has outperformed the MLP Index for two consecutive months, which has the AMNA ahead of the MLP Index by 250 basis points this quarter.  AMNA still trails the MLP Index for the year overall.

 

Winners & Losers

TLP was the biggest MLP winner this week, following the cash buy-out agreement announcement on Monday.  PAA was the second best performer, perhaps on some oil relief, but also probably the result of New York marketing meetings this week that led to sell-side analyst chatter, and building buzz on the Capline reversal potential.  HMLP was up on 3Q results announced this week.  USAC and DKL were just up.  On the downside, lots of more obscure MLPs in the bottom 5 this week.  NBLX continues to trade poorly after the initial post-election bounce.

HCLP and DLNG repeated in the bottom 5 this week, no repeats in the top 5.  On the YTD leaderboard as we enter the home stretch of the year, there is still some movement.  CQP climbed into the second spot, while HCLP joined the bottom 5 after a few bad weeks.

Midstream Corporations & General Partners

This group outperformed MLPs and Canada this week, up 3.4% median.  The last un-simplified pure-play general partner, EQGP, was up 25% this week, including 17.5% on Friday after the big simplification announcement.  ETRN was up earlier in the week, and it finished in the top 5 as well, despite falling sharply Friday.  PAGP, LNG and AMGP rounded out the top 5 this week.  Only 2 in the group were negative this week, with ALTM as the standout loser again this week.

ETRN and EQGP repeated in the top 5, AMGP and LNG bounced back from last week.  On the YTD leaderboard, OKE is still in the lead, but LNG closed the gap.  PAGP leapfrogged TRGP into the 3rd spot.  EQGP made a huge jump from 2nd to last up to 4th to last, with SEMG holding on to the bottom spot.

Canadian Midstream Corporations

Canadian price action was more subdued (as usual), with a tight range of performance across the group.  Pembina and TRP led the way, while IPL was the standout loser in the group.

IPL repeated near the bottom of the group and TRP repeated close to the top of the group, continuing to have positive momentum coming out of its analyst day a few weeks ago.  On the YTD leaderboard, just one stock is positive, followed by small negative from Pembina, then the rest of the group down double-digits.

News of the (Midstream) Week

Midstream clean-up continued this week with two roll-up agreements edging closer to completion (TLP and DM) and another IDR simplification that eliminates the last pure-play GP standing (EQGP).  In addition, news outlets are chattering on a few packages of midstream assets for sale.

Capital Markets

  • None.

Growth Projects / M&A

  • Equitrans Midstream (ETRN) announced purchase of outstanding units of EQGP at $20/unit, a 17.5% premium to prior day close, and exercise of limited call right totaling approximately $530mm (press release)
    • Private purchases are expected to close on 12/31/18, after which ETRN and its affiliates will own more than 95% of outstanding EQGP units
    • After private purchases close, ETRN intends to exercise the limited call right to acquire all remaining EQGP units not then owned
    • ETRN also made a proposal to EQM Midstream (EQM) for the exchange of its IDRs and economic GP interest in EQM for 95mm EQM units and a non-economic GP interest in EQM
    • Following the simplification of EQGP and EQM, ETRN will have a projected 61% ownership of EQM
    • EQGP went public at $27/unit in May 2015, peaked at $34.67/unit in June 2015, cumulative total return -32% since the day after IPO, -17% if you bought in the IPO vs. -27% decline for the AMZ since IPO
  • TLP Finance, an indirect subsidiary of ArcLight Energy Partners, announced the acquisition of TransMontaigne Partners (TLP) at $41/unit, or a $536mm transaction value (press release)
    • The offer price represents a 7.9% premium compared to the initial offer on 7/9/18 and a 12.6% premium to prior day closing price
  • Tallgrass Energy (TGE) announced it signed a binding agreement with an unaffiliated third-party that has the potential to be an anchor shipper and equity partner on the Seahorse Pipeline (press release)
    • In addition, TGE announced Pony Express Pipeline will launch a new joint tariff open season
    • TGE also announced a $30mm land acquisition that will serve as the site for its Plaquemines Liquids Terminal in Louisiana
  • Dominion Energy (D) and Dominion Midstream (DM) announced definitive agreement for merger, with a revised price that represents roughly a 1% increase to D’s original offer (press release)
  • CPLP announced the spin-off of its crude and product tanker business and plans to merge it with DSS Holdings’ business and operations in consideration for $23mm (press release)
    • The new company will be called Diamond S Shipping and is expected to be listed on the NYSE
    • CPLP unitholders will initially own 33% and DSS equity owners will own 67%
  • Gibson Energy (GEI-CA) announced the sale of its non-core Environmental Services North and Wholesale Propane business for C$100mm (press release)
    • Proceeds will be reinvested in the tankage and pipeline infrastructure projects currently under construction
  • Bloomberg reported that Williams (WMB) is considering a sale of its 50% stake in Jackalope Gas Gathering Services which could go for more than $500mm (Bloomberg)
    • Crestwood Equity (CEQP) owns the other 50% of the JV
    • A high multiple sale would be a positive data point for WMB and CEQP
  • Reuters reported that WhiteWater Midstream LLC is exploring a sale that could result in more than $2bn (Reuters)
    • WhiteWater is based in Austin and is backed by investments from Denham Capital and Ridgemont Equity
    • WhiteWater’s main assets is a majority stake in the Agua Blanca natural gas pipeline in the Delaware portion of the Permian, which went into service earlier this year
    • Agua Blanca is also partially-owned by WPX and MPLX at 20% each

Other

  • Alerian announced new methodology for the Alerian MLP Index, to be implemented with the next quarterly rebalance on December 21 (Alerian)
    • Criteria for inclusion: (1) be structured as publicly-traded partnership or LLC, (2) be involved in midstream energy activities, and (3) have a market capitalization of at least $75mm
    • This will shake things up and add several smaller midstream MLPs that we track here, but which have been restricted from the index because of criteria for daily trading volumes in the past (DKL, HESM, SRLP, USDP, MMLP)
    • This likely means ARLP, VNOM, HCLP and possibly USAC would not qualify any longer
    • There will also be a large special re-balance in a few weeks when EEP and SEP merger with ENB closes
  • TC Pipelines (TCP) received $95mm from Tenaska for the termination of the transportation service agreement on Bison Pipeline (filing)
  • Ferrellgas Partners (FGP) CFO Doran Schwartz and COO Trenton Hampton voluntarily terminate employment (filing)
  • KNOT Offshore Partners (KNOP) announced the resignation of CEO/CFO John Costain (press release)