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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Stalls at Altitude

Midstream was mixed this week, with MLPs closing slightly lower after 4 very strong weeks of positive performance.  Positive performance from some of the larger corporations in the U.S. and Canada helped the broader midstream indexes finish positive and keep pace with energy stocks (XLE) and oil prices, both of which drifted higher this week.

Both ENB and KMI announced 2021 guidance that confirmed lower dividend growth to leave room for more flexible means of returning capital to shareholders (after debt targets are reached).  Leverage remains a challenge for most midstream companies, especially those expecting lower EBITDA going forward.  The midstream companies positioning for share buybacks continue to attract investors, even if those buybacks are unlikely to occur until further work is done on leverage.

Breaking the 200-day Barrier

Even with the pause in performance this week, both the AMZ and the AMNA crossed key technical milestones this week.  For the first time since September 2019, the 50-day moving average for each index closed above the 200-day moving average.

Technical analysis is not an expertise of mine, but clearly the math is that when the 50-day crosses the 200-day on the way up, there has been an inflection.  But such a move doesn’t predict a positive move in the future.  To prove that, just go back and look at the last time it happened (March 2019) and you can see the lack of a sustained positive move after that event.

But it does make the chart look better, and it does show that positive momentum has been sustained for a while now (which we already knew).

The Right Stuff or Spam in a Can

Chuck Yeager, a hero of mine, passed away this week at 97 years old.  I learned about him from Tom Wolfe’s The Right Stuff, which may be my favorite book of all time.  Yeager was famous years before that book as the test pilot who broke the sound barrier.  He was an active pilot in 3 major wars and then went on to live an extremely long life.  He was very active on Twitter even in 2020, and I remember interacting with him back in 2016. 

The period of U.S. innovation after World War II (with the help of German scientists from Operation Paperclip) that eventually led to the U.S. coming from behind to win the space race is endlessly fascinating to me.  Most of the book is dedicated that story of innovation, but it is grounded in the personal stories of test pilots like Chuck Yeager and the original seven Mercury Astronauts.  The Mercury Seven were national celebrities, but they also became Houstonians who were hosted at cocktail parties by my grandparents, among others. 

Being a test pilot is tempting fate.  Flying already carries with it risk, but test pilots flying at higher altitudes and at greater speeds than ever before amplify that risk.  But at least the test pilot has some element of control over the situation. Yeager gave a speech once where he said the first rider in the Mercury space crafts would be a monkey, not a real test pilot.  Just along for the ride.  That notion was adapted in the film version of the book into Yeager equating the original astronauts to “Spam in a Can.”

Investing in energy stocks since 2014 has carried substantial risk.  It has often felt like being “spam in a can”, with even the best managed companies being dragged down in the face of challenging macro conditions (although energy companies were responsible for some of that too).  But there will be survivors who will live to test terminal values being debated today, as Yeager did.

Winners & Losers

MLPs

PAA was the biggest loser this week, dramatically underperforming other large cap MLPs, on no news.  Not much of a trend among the winners, but NGL was the biggest winner.

OMP repeated in the top 5, SUN went from bottom 5 to top 5 week-over-week.  On the YTD leaderboard, SRLP took over the top overall spot after a strong week.  Among the biggest YTD losers, PAA returned to the bottom 5, switching places with PSXP.

Midstream Corporations

Stabilized oil prices have been positive for natural gas liquid (NGL) pricing, which helped AM’s sponsor Antero Resources trade sharply higher this week, which helped AM outperform this week.  KMI underperformed on weaker than expected 2021 outlook.  HESM benefitted from the chance for management to tell their story at a major conference this week, and the company also traded well Friday on a sell-side analyst upgrade.  HESM continues to execute, but it tends to get lost in the shuffle at times, so conferences are generally positive events.

On the YTD leaderboard, AM is now up a stunning 40% including dividends, far ahead of the pace.  HESM climbed into second place followed by WMB and LNG, and ALTM remains in 5th after its incredible bounce this quarter.  The bottom 5 looks better than it has at times this year, but ENLC did drop back into the bottom 5 on its rough week.

Canadian Midstream

Canadian midstream corporations produced mixed returns this week, with ENB’s analyst day and guidance generally satisfying the market.  GEI continues to be weak as it has since announcing 3Q results. After trading well for most of the year, it seems to be a stock that investors are rotating away from as animal spirits return. This week, GEI announced its 2021 capex outlook, which did not change the trend. Inter Pipeline announced its capex plan for 2021 this week as well.  Pembina traded well this week, but still owes the market 2021 guidance, probably coming next week.

On the YTD leaderboard, ENB’s late surge has put it ahead of TRP and GEI for the outright lead.  Pembina climbed a spot into 4th place overall, but it has a big gap to cover to catch GEI for 3rd place.   IPL is far and away the worst performer in Canadian midstream in 2020.

News of the (Midstream) World

Some small capital markets activity, no M&A announcements or fresh growth projects announced this week.

Capital Markets

  • TC Energy (TRP-CA) announced equity distribution agreement to sell up to $1.0bn worth of common shares at-the-market (press release)
  • Genesis Energy (GEL) priced $750mm (upsized from $500mm) worth of 8.0% senior notes due 2027 (press release)
  • Gibson Energy (GEI-CA) announced offering of $250mm of 5.25% fixed-to-fixed rate subordinated notes (hybrid notes) due 12/22/2080 (press release)