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CBRE GLOBAL INVESTORS

CBRE Global Investors, combined with CBRE Clarion Securities and CBRE Caledon, is one of the world’s leading real asset investment managers providing real estate and infrastructure investment solutions to over 500 clients worldwide.

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CBRE Global Investors is the investment management division of CBRE Group, Inc. the world’s premier commercial real estate services and investment firm.  The company’s shares trade on the New York Stock Exchange under the symbol “CBRE.”

REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Still Waiting for Its Kodak Moment

Midstream underperformed this week, even after counting the juicy dividends that were paid this week. Tech stocks, utilities and other sectors reported strong earnings and saw stock price gains as a result. 

In midstream, results were solid overall, but lower oil prices and generally uncertain outlook hurt midstream performance late in the week.  Ex-dates for dividends were likely also a factor, with some investors either playing distribution capture games or others holding out for one last dividend before blowing out of midstream exposure.

“You Press the Button, We Do the Rest”

Eastman Kodak’s stock shot up and made news this week, rallying from $2.10/share to an incredible $60/share at the peak (+2757%), before dropping 63% from that peak to close the week up just 940%.  I made the joke on Twitter that MLPs should see that and be hopeful.  If they can find a way to pivot like KODK, MLPs could see a huge surge in their prices too. 

We are seeing utilities pivot their entire focus towards renewable or green energy efforts, and they are being rewarded in the market.  We haven’t seen midstream management teams take many strategic chances, even with distribution policy.  It takes extreme ratings agency pressure just to convince midstream companies to try a different capital allocation strategy than the one that was clearly not working. 

If there is an analogy to Kodak, maybe oil and natural gas are the film, and MLPs are the Fotomat or Fox Photo booths that used to operate in the parking lot of the local shopping mall (another relic). 

You don’t see those anymore, but the booths were a staple back when I was growing up.  See below for a classic picture of a Fotomat booth with Kodak Film.  I was not around at the time when this picture was taken.

I was around for Back to the Future (1985) and Parenthood (1989), both of which prominently featured Fox Photo booths. 

In Parenthood the photo booth drove the plot.  Keanu Reeves’ character (Tod) picks up his girlfriend’s developed photos from the booth, but soon realizes his girlfriend’s mom had already picked up their risqué photos. 

Good luck explaining any of this to your kids, especially this week’s KODK stock move…

Status Update: Midstream Still in the Bad Place

The broad midstream index declined for a second straight month after its sharp bounce off the bottom in April that extended into May.  AMNA total return is -17.3% off the peak in early June.  July’s decline puts AMNA back to more than -30% total return year-to-date.

Looking forward, each of the last 3 years has been negative for AMNA in August, and in 4 out of the last 5 years in August.

MLP Index Status Update: Even Worse

The MLP-only index was likewise negative in July, but down more than AMNA.  Since peaking in early June, AMZ total return is -24.8%.  The violent swings in midstream continue, but we lacking catalysts that would lead to an inflection point.

Looking ahead, AMZ has been negative 4 of the last 5 years in the month of August, and in the last 13 years there have been only 4 positive August performances.

Winners & Losers

MLPs

CNXM won the week but has been a loser all year and for most of its life as a publicly-traded entity.  Small MLPs with distributions announcement this week were also winners, including DKL, GLP and CAPL (who announced distribution last week).  NBLX was among the winners, maybe on a read through from the CNXM deal that maybe NBLX could be next.

DKL repeated in the top 5 week-over-week.  On the YTD leaderboard, SRLP extended its lead on the midstream universe, DKL climbed into third place overall.  PAA joined the YTD bottom 5, replacing CNXM.

Midstream Corporations

There were a few positive names this week, led by Cheniere Energy, continuing its recent strong relative performance.  Permian players dominated the bottom 5, including TRGP, PAGP and RTLR. 

On the YTD leaderboard, Cheniere grew closer to WMB and the second-best spot overall.  AM is well ahead of the others on a total return basis, but is down 26% on price change alone, a staggering difference due to its extremely high yield.  Among the worst performers, OKE is still in the cellar despite its strong move post-earnings.  Other upstream-oriented stocks make up the remainder of the biggest loser group.

Canadian Midstream

ENB and TRP were positive on resilient earnings reports. The rest of the Canadians were negative this week.  There was little news in Canada this week, other than the write down of oil sands assets by Total, which may have impacted the upstream-oriented names in this group like IPL-CA, KEY-CA. 

On the YTD look, no material changes, with TRP holding firm at the top.

News of the (Midstream) World

This week brought another egregious example of very poor corporate governance that continues to be an issue, especially for MLPs with publicly-traded sponsors with their own fiduciary duties. 

Capital Markets

  • Enterprise Products (EPD) priced $1.25bn worth of senior notes (press release), including:
    • $250mm of re-opened 2.80% senior notes due 2030 at 107.21% of par (originally issued 1/15/20)
    • $1.0bn of 3.20% senior notes due 2050 at 99.233% of par to yield 3.22% to maturity
  • Kinder Morgan (KMI) issued $750mm of 2.0% senior notes due 2031 for 99.06% of par (filing)
    • KMI also issued $500mm of 3.25% due 2050 at 98.565% of par
    • Also, Rich Kinder bought 300,000 shares of KMI this week, a sign he may be active again, which has been a support for the stock in the past

M&A / Growth Projects

  • CNX Midstream (CNXM) announced take-out by sponsor CNX Resources (CNX) in all-equity transaction at 28% premium (press release)
    • Transaction value of $357mm
    • Each outstanding CNXM unit will receive 0.88 shares CNX common stock
    • This transaction comes just months after CNXM announced an expensive IDR take-out
    • That IDR take-out multiple was then rendered meaningless when the IDR cash flow was reduced to nothing with an 80% distribution cut that didn’t seem necessary
    • CNXM rallied 30%+ this week, but still finished the week -2.9% lower than its recent high in June, and -24.6% from its price the day before announcing the 80% cut

Other

  • Genesis Energy (GEL) announced cost savings initiatives and amends credit facility (press release)
    • Actions to result in annual savings of approximately $38mm
    • Expanded its consolidated leverage ratio covenant to 5.75x from 5.50x in 3Q through 1Q 2021
    • Cost savings associated with reduced headcount

Distributions

  • More distribution announcements this week, including a few cuts.