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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Trypophobia

Midstream stocks took cues from the broad market this week, drifting lower early in the week before mounting a comeback later in the week, including a big Friday after the robust jobs report.  Oil prices recovered throughout the week such that the OPEC meeting proved anti-climatic in the end.  U.S. midstream and MLP indexes were slightly negative, while Canada pulled the AMNA into positive territory.

Commodity prices were positive for the week, in the chart above, the NGL prices look negative, but that’s compared with Wednesday before Thanksgiving, because there weren’t prices posted for Friday, so that number desn’t capture the big oil price decline Friday.

The MLP Index has declined 11 straight weeks now, by far the longest streak in the history of the Alerian MLP Index.  Unlike 4Q of last year, MLPs seem to be on their own in this selloff, because the slow grind lower has coincided with a period when oil prices and the broader stock market were stable or higher. 

At some point the streak will be broken with a positive week, but it should be clear to everyone that this selloff is about more than just tax loss selling and short sellers.  It is the orderly unwind of a massive buildup of MLP products and dedicated “active” managers.

One Decade Down

As of this week, I have now been publishing thoughts on MLPs at MLPguy.com for more than 10 years.  I published a post earlier this week reflecting on the last 10 years, particularly what’s changed since then.  Click here if you missed that piece (I did not send out via email).

Midstream Trypophobia

My daughter came home from her middle school science class in September with news of a phobia I had never heard of: trypophobia.  It describes the feeling of disgust or revulsion experienced by some people when they see images of irregular patterns or clusters of small holes or bumps, as in honeycombs, certain foods, or (as we have learned) foamed milk.

After some research online (i.e. reading about it on wikipedia), it turns out there is a reason I had not previously heard of it: it was basically created in 2005 when people began discussing their reactions to images shared online.  Below is an innocuous example of an image that appears to trigger trypophobia among very sensitive viewers.  For much more graphic images, try a quick google image search.

In my house, we immediately googled images and found out my wife and one of my sons are trypophobic, as evidenced by their strong reactions to the pictures.  But the most interesting part is that since discovering their phobia, they both have started to recognize holes in everyday life.  In effect, since being introduced to the fear of holes, they are seeing more holes and cannot un-see holes in things that did not previously bother them.

How does one treat trypophobia? Apparently one treatment that works is exposure therapy, commonly used to treat other phobias.  I think it would work as follows: I sit my wife and son down in front of a big screen, hold their eyes open and show them images of holes until they stop having bad reactions to the images.

As the midstream investor community has lost its optimists as funds have flowed away from dedicated managers, the remaining interested parties are highly skeptical and cynical of every move midstream companies make.   In essence, the market has grown increasingly focused on the “holes” of the sector, which may reflect a shift in investor base towards more hedge fund participants.

The market sees holes (dilutive IDR deals, poor capital allocation, counterparty risk, competition, etc.), and is clearly repulsed by them.  Increasingly, however, these “holes”:

  1. Are impacting smaller names less relevant to the overall midstream sector
  2. Are being resolved
  3. Are driving down prices such that path for better stock performance is easier from here

It appears the market is unwilling to reward the sector until free cash flow is more readily achievable.  The lingering issues are real and include: corporate governance, fund flows away from an obsolete MLP fund complex, competition, and slowing upstream development. 

Eventually, the market gets enough exposure to these negatives (even the negative fund flows) and the repulsion and cynicism fades and optimism returns to this beaten down sector.  Eventually, the large strides that have been made with regard to leverage, dividend sustainability, IDRs and capital discipline start to attract some optimism and the holes don’t matter as much. 

That didn’t happen this week with the WMB analyst day, expect the ENB analyst day to be better received among Canadian investors, who generally have a sunnier disposition when it comes to energy stocks.

Winners & Losers

MLPs

USDP led all MLPs in performance this week, likely helped by new joint venture with Gibson announced by its sponsor this week.  Two beaten down G&P MLPs had positive weeks this week (MPLX and ENBL), while the bottom 5 featured 3 G&P MLPs that did not fare quite as well (CEQP, EQM, SMLP). 

GMLP went from first to worst, week over week.  On the YTD leaderboard, USAC fell out of the top 5, replaced by EVA. 

Midstream Corporations

ALTM repeated as top performer among midstream corporations this week.  KMI and OKE drifted higher and Cheniere rallied Friday to end the week flat.  WMB’s analyst day was not met with much enthusiasm, and the stock finished negative on the week.

AM finally avoided the bottom spot this week after three consecutive weeks at the bottom, but still ended up in the bottom 5.   TRGP repeated in the bottom 5.  On the YTD leaderboard, removing SEMG made room for Cheniere as number 5 in the group.  No material changes among the bottom 5.

Canadian Midstream

Gibson led all Canadian Midstream corporations this week after announcing a small but very Canadian strategic new project alongside a partner, backed by a long-term agreement with a strong counterparty.  ENB again was among the top performers in a universally positive week for the group.

YTD, GEI took over the top spot from TRP, which has been treading water for a few months.  ENB continues to rise up the charts, ahead of its analyst day (happening this week).

News of the (Midstream) World

No meaningful transaction news this week. 

Capital Markets

  • None.

Growth Projects / M&A 

  • Gibson Energy (GEI-CA) and U.S. Development Group announced a JV agreement to develop a diluent recovery unit (DRU) near Hardisty, Alberta (press release)
    • ConocoPhillips Canada has contracted to process 50,000 bbls/d of inlet bitumen blend under a long-term, take-or-pay contract through the facility, and the output will be shipped by Canadian Pacific and Kansas City Southern to the Gulf Coast
    • The unit could be placed into service as early as Q2 2021
  • Energy Transfer (ET) completed the acquisition of SemGroup (SEMG) (press release)
    • SEMG’s last trading day was 12/4

Other

  • Tallgrass Energy (TGE) appointed Matthew Sheehy as President, effective immediately (press release)
    • Sheehy will report to CEO Bill Moler, appointed last week
  • Enterprise Products (EPD) Chairman Randa Williams purchased $10.5mm worth of EPD stock in two separate transactions this week (S-4 filings)