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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

Week Thoughts: Spoiler Alert

Midstream stocks traded okay overall this week, but underperformed utilities and the S&P 500, which closed at a fresh all-time high after better than expected U.S. GDP data.  The MLP Index (AMZ) underperformed the Midstream indexes (AMNA and AMUS), extending midstream’s lead over last 12 months and YTD. 

Oil prices were stable and positive until Friday when Trump rhetoric again seemed to impact sentiment, even if the tweets about how he “called OPEC” were refuted by the primary OPEC leadership.  The upstream side of the energy sector was again the primary focus this week, with a topping bid for APC from Oxy coming across mid-week, raising more questions for the future of APC’s midstream subsidiary.  NBL’s midstream subsidiary likewise had its future clouded by reports of strategic evaluation by its sponsor.

Midstream will reclaim the spotlight next week, with tons of earnings, including: EPD, OKE, WMB, MMP, PSXP, CEQP, EQM/ETRN, ENLC, WES, ENLC, ENBL, SHLX, AM, ALTM, NBLX, Pembina, and TransCanada. 

Spoiler Alert Season

These days, if there is some work of TV or film fiction with plot points you care about, avoiding spoilers for more than a few days is a real challenge.  Especially if you have a twitter or YouTube account where you follow accounts that tend to discuss those works of fiction.  Prime examples this weekend are Avengers: Endgame and Game of Thrones.  The only way to avoid spoilers is to avoid all social media until you see the film or episode.

It feels like some investors with midstream allocations would like to avoid spoilers during earnings.  Ahead of the earnings onslaught, investors seemed to take the money (distributions and dividends that went ex-date) and run this week, rotating into the largest U.S. and Canadian corporations.  KMI and TRP benefitted from that de-risking and were the big winners of the week (see more on them below).

When I finally see Endgame this weekend, I’ll be able to “join the conversation” across the internet with my fellow nerds.  After this week’s first round of MLP/midstream earnings, maybe market participants will feel more comfortable going full “binge-mode” on midstream again.

Cherry Picking Dates

YTD gains for midstream may be one reason investors are quick to trim.  Midstream opened the year with big gains, but the rally has stalled out while the broad equity market caught up.  YTD gains still look high, but extending the review period beyond the arbitrary calendar year makes the rally less impressive, especially for MLPs.

The MLP Total Return Index (AMZ) is 9.2% below its 2018 peak, which was 8/9/2018 and it was at its current level in early October.  So, if you’ve been on the sidlines because of the hot start to the year, let’s not forget the extreme volatility into the end of last year.

Winners & Losers

Not much of a rhyme or reason to the top 5 MLP performers this week.  GLOP bounced back after poor showing last week, after announcing results.  SRLP traded well after maintaining its distribution.  In the bottom 5, MMLP was down 24% after cutting its distribution.  NBLX bounced Thursday afternoon and sold off Friday on the NBL midstream sale reports to land in the bottom 5.

MMLP repeated as the worst performing MLP.  SMLP repeated in the bottom 5 too.  No repeats in the top 5, but HESM did follow up last week’s gains with some positive action that pushed it into the top 5 year to date.  Other leaderboard moves of note: MMLP to the bottom spot, SMLP to second worst.  BPMP also continues to trade poorly.

Midstream Corporations

This week’s price action in the U.S. corporation group reflected what I believe to be de-risking into earnings.  The market doesn’t seem to have much confidence in midstream earnings from here.  TRGP’s strong performance notwithstanding, stock performance in midstream corporations this week seemed to favor defense.  Kinder Morgan and TransCanada led their groups.  KMI already posted 1Q results, so choppy results for others shouldn’t impact their trading too much.  TransCanada is among the least volatile midstream stocks in the universe. 

TRGP has outperformed the group for two straight weeks now, perhaps benefitted from better NGL prices and some modestly better natural gas prices at Waha.   ALTM, SEMG, AM were the bottom 3 again this week.  On the YTD leaderboard, ENLC and WMB were leapfrogged by KMI, and OKE also breached 30% YTD returns.  PAGP replaced AM in the top 5 despite underperforming this week.

Canadian Midstream

As noted above, TRP was strong this week, especially on Friday when the other Canadian midstream stocks were weak.  ENB was keeping pace with TRP this week until Friday’s divergence.  The larger names dominated performance overall.  Next Friday, TransCanada and Pembina report results.

Keyera and Gibson tumbled this week, which allowed TRP to extend its lead on the group for YTD returns.   All 7 stocks remain up for the year and all but KML are up 15%+.

News of the (Midstream) World

Uptick in news flow ahead of a big few weeks of earnings.  PBFX successfully raised common equity in a discrete equity transaction, proving the capital markets aren’t 100% shut.  HESM and OKE announced expansions in the Bakken.  But the real fireworks came from a topping bid from OXY for APC, potential strategic alternatives for NBLX.   On the smaller, more retail end of things, EMES filed for bankruptcy and two MLPs cut distributions 50% each.

Capital Markets

  • PBF Logistics (PBFX) announced sold 6.5855mm shares for $135.0mm in gross proceeds, implying $20.50/unit price, in a registered direct offering to institutional investors (press release)
    • Price represented a 4.25% discount to prior day closing price, closed the next day at $21.55/unit, +5.1% from deal price

Growth Projects / M&A

  • PBF Logistics (PBFX) announced $200mm drop-down acquisition from sponsor PBF Energy (press release)
    • PBFX to acquire remaining 50% interest in Torrance Valley Pipeline Company LLC (TVPC)
    • TVPC owns the 189-mile San Joaquin Valley Pipeline system that supplies crude oil to PBF Energy’s Torrance refinery
    • Acquisition expected to be immediately accretive and to generate $25mm in EBITDA, implying an 8.0x EBITDA multiple
  • ONEOK (OKE) announced plans to invest approximately $100mm to construct a 75-mile NGL pipeline lateral connecting the northern portion of the Bakken NGL Pipeline with a third-party processing plan (press release)
    • Lateral expected to be in-service in 4Q 2020, supported by long-term dedicated NGL production, including minimum volume commitment
  • Hess Midstream (HESM) announced plan to expand natural gas processing capacity at its Tioga Gas Plant (press release)
    • HESM to expand the facility by 150 mmcf/d, creating a total of 400 mmcf/d of processing capacity
    • The expansion is expected to be in-service in mid-2021 and cost $150mm gross, or $30mm net to HESM
    • This seems to be related to the NGL lateral OKE will construct (discussed above)
  • Energy Transfer (ET) and Phillips 66 Partners (PSXP) announced a non-binding open season for the Bayou Bridge Pipeline joint venture (press release)
  • Noble Energy (NBL) confirmed in 8-k filing that review of strategic alternatives for its ownership in Noble Midstream (NBLX) is underway, with wide swatch of potential outcomes (filing)

Other

  • Apache (APA) announced temporary deferral of Alpine High natural gas production due to low in-basin natural gas prices (press release)
    • ALTM affirmed 2019 guidance would remain intact (after the big reduction in guidance earlier this year), implying some support from APA
  • Occidental (OXY) announced higher bid to purchase Anadarko Petroleum (APC) after agreement with Chevron announced on April 12 (press release)
    • OXY presentation highlighted importance of owning midstream and seemed positively disposed to WES, but WES traded down on the Oxy bid
  • American Midstream CEO Lynn Bourdon announced resignation (press release)
  • Emerge Energy Services (EMES) files for Chapter 11 bankruptcy and announced restructuring support agreement (press release)

Dividend / Distribution Announcements

  • 25 distributions and dividends announced this week, 43 total for the quarter so far
  • BKEP and MMLP cut distributions by 50% each this quarter and it was the second major distribution cut for each of them
  • NRP announced a special one-time distribution of $0.85/unit, meant to cover the tax liability that will stem from sale of the construction aggregates business