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?
Total Voters: 86
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.
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 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.
Growth Projects / M&A