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REAL ESTATE SERVICES

Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Holds Up, The Sequel

In a repeat of last week’s storyline, Midstream and MLPs held up better than broader energy in a falling oil price and stock market.  The primary difference being that this week’s losses were bigger all around.    Even utilities were down big this week, despite nearly 20 bps decline in interest rates.

Here We Go Again…Again

Sequels are usually the same basic idea as the original, but everything is much bigger, the stakes higher.  The wildest example of the escalation is the Fast & Furious franchise.  In the first movie, a street racing gang robs local trucking firms for DVD players, while enjoying a team barbecue afterwards.  By Fast 5, the gang are international fugitives who jump cars into trains and drag a giant vault around the streets of Rio during the day accompanied by stolen police cars…still while enjoying a team barbecue afterwards. 

This phenomenon was sent up hilariously at the beginning of Tropic Thunder with the fictitious Scorcher film franchise: “…the world called on the one man who could make a difference.  When it happened again, the world called on him once more.  Now, the one man who made a difference 5 times before is about to make a difference again…only this time, its different.”

This week was like a movie sequel for Midstream.  As disruptive as the trade war and fresh tariffs on Mexico have been, Midstream stocks in 2019 have been a place to see strong returns on good days and to hold on to most of those gains after the worm turned this month and bad days have.  There is hope that a smaller, healthier midstream sector, or Midstream 2.0: The Sequel, can outperform sustainably from here and start the equivalent of a re-booted film franchise.

“Molecules of U.S. Freedom”

This week, the DOE announced approval of additional LNG exports from the Freeport LNG facility in Texas.  In the press release, Assistant Secretary for Fossil Energy Steven Winberg referred to LNG exports as “molecules of U.S. freedom”.


Which of the below monikers for LNG or gas exports do you prefer?

  • DOE’s Choice: Molecules of U.S. Freedom (35%)
  • Frozen Democracy Juice (26%)
  • Frosted Liberty Vapor (24%)
  • Big Hairy American Winning Molecules (15%)

Total Voters: 86

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While it’s fun to imagine any of the above being said earnestly by Rick Perry or Will Ferrell as George Bush, there truth in the sentiment.  The shale revolution has created a massive source of energy that can help diversify and stabilize energy supply for developing economies globally.  Thanks to the energy industry and the midstream sector, the U.S. has something to offer in negotiations on global trade. 

As the global trade rhetoric eventually settles down, potentially in time for a 2020 election cycle, expect any resolution to prominently feature energy exports.  Global demand for LNG and light NGLs (ethane and propane) represents secular growth with increasingly visibility, especially relative to refined products/oil.  Cheniere’s mini analyst day this week will discuss capital allocation plans, but all with the backdrop of a healthy outlook for LNG demand globally.

Also, the midstream assets focused on moving those Freedom Molecules to export/demand centers are more valuable than ever, even if that value is not captured in their stock prices.   But value is starting to be recognized.  Two of the easiest/laziest ways to express a positive gas pipeline view are the two best performing midstream corporations in North America (KMI and TRP).

I leave you with an image that the Freedom Molecule comment reminded me of: a scene from the original British version of “The Office” in which David Brent sings his original song “Freelove Freeway”.  Gas has been less than free in West Texas at times this year, but long pipelines are coming soon.

Status Update: Mayday Mayday Mayday

The AMNA was down for a second straight month, but AMNA has still produced nearly 20% total return YTD.  Looking ahead, the AMNA had been positive in June and July for each of the last 3 years. 

The MLP Index was also down for a second straight month and down 2.5% for the quarter so far.  While volatility in the broad market escalated in May, the MLP Index was down less than it was in April, which is a bit encouraging.

Looking ahead to June, the MLP Index has a positive average return and has a higher hit rate than May.  On the other hand, historically the highest return ever for June was in 2014 when the index produced 5.9% total return.  That max is the second lowest of all months (February at +4.6% is the lowest).   

Winners & Losers

There were only 4 positive MLPs this week.  CAPL led all MLPs this week, likely on follow through after closing its first tranche of asset exchanges last week, also because falling oil prices is generally positive for wholesale gasoline margins and volumes.  NGL was up after reporting results and forward year guidance above consensus expectations.  The bottom 5 included ET, which was the biggest loser among large cap midstream companies and MLPs.  Also, producer-backed MLPs NBLX and OMP were notable underperformers.

No repeats among the top or bottom week over week.  OMP went from top 5 last week to bottom 5 this week.  On the YTD leaderboard, NGL pulled further ahead.  NS replaced SHLX in the top 5, and there were no changes among the bottom.

Midstream Corporations

Not a single U.S. midstream corporation was positive this week, but there were some notable outperformers, KMI chief among them.  TGE and RTLR were also outperformers.  LNG caught a bid late in the week ahead of its captial allocation announcement analyst day events early next week.  On the downside, PAGP seemed to be impacted by large selling unitholder, while others in the bottom 5 tend to trade with higher correlation to oil and NGL prices.

KMI and TGE repeated near the top this week, with WMB not far behind in both weeks.  ALTM and TRGP were near the bottom in both weeks.  On the YTD leaderboard, KMI extended its lead as OKE fell off the pace.  WMB took over the second spot and ENLC is still clinging to the 5th spot despite a rough week. 

Canadian Midstream

Canadian midstream corporations were the best performers of all of midstream this week.  There were two positive stocks and TRP’s asset sale helped it finish close to flat for the week.  ENB was the worst performer, but still held up relatively well by comparison.

KMP bounced back for the first time in a few weeks since its strategic review bore no fruit.  On the YTD leaderboard, most Canadian midstream stocks are still 20%+ returners for the year, with TRP in the lead and even ahead of KMI as the best performing large cap midstream company this year.

News of the (Midstream) World

This week, we got more signs that capital markets are opening up, and major holders of midstream stocks have taken notice and are taking the opportunity to reduce.  Also, we saw continuation of capital discipline (PAA/DKL) and capital recycling (TRP) ongoing trends. 

Capital Markets

  • Private equity firm EMG sold 15mm PAA units on Tuesday at $23.10/unit (form 4 filing)

Growth Projects / M&A

  • Plains All American (PAA) announced expansion and JV of Red River Pipeline with Delek Logistics (DKL) (press release)
    • DKL purchased 33% ownership interest in the JV for $128mm from PAA
    • PAA will retain 67% interest and continue to operate the system
    • The expansion will increase the total system capacity from 150,000 bpd to 235,000 bpd and is expected to be completed in H1 2020
    • Delek US (DK) will increase its long-term throughput and deficiency agreement on the system from 35,000 bpd to 100,000 bpd
  • TC Energy (TRP-CA) announced sale of 85% interest in Northern Courier Pipeline to Alberta Investment Management Company (AIMCo) for C$1.15bn (press release)
    • The sales price represented approximately 14x 2018 EBITDA, another positive data-point for private equity interest in midstream assets
    • TRP placed the pipeline into service at a cost of C$1.0bn in late 2017, sale for valuation of C$1.35bn is positive
    • The 56-mile pipeline will continue to be operated by TRP as it transports bitumen and diluent between the Fort Hills mine site and Suncor Energy’s terminal north of Fort McMurray, Alberta
    • Next up on TRP’s quest to divest C$2.2bn (with C$1.6bn complete/announced to date) is Columbia Midstream and Eastern Canada power plants
  • Altus Midstream (ALTM) exercised and closed its option to acquire a 27% interest in Permian Highway Pipeline for $161mm (press release)
    • The pipeline is expected to be in service by October 2020 and is owned by ALTM, Kinder Morgan (KMI), EagleClaw Midstream, and an anchor shipper
  • Enterprise Products (EPD) announced extension of its ethylene pipeline network further into South Texas (press release)
    • 90-mile pipeline and storage will connect EPD’s ethylene pipeline & logistics pipeline system to growing petrochemical area of South Texas
    • Scheduled to be in-service by 4Q 2020
  • Magellan Midstream (MMP) and Navigator Energy Services announced extension of the open season for the proposed Voyager Pipeline by three months due to the level of shipper interest and requests for additional grades of oil and condensate at Cushing (press release)
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Other

  • Altus Midstream (ALTM) announced departure of COO Craig Collins (press release)
    • ALTM had only created the position of COO in early April, and Collins was on the job for just one month
    • ALTM replaced its CEO in January