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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

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Week Thoughts: Midstream Un-Challenged

Midstream rallied for a third straight week.  Both the AMNA and AMUS indexes have rallied 20% off the Christmas Eve bottom, while the AMZ is up 17.8% over the same period.  Oil and natural gas prices and the broader equity market were supportive of midstream gains this week.

PCG expected bankruptcy plans dominated headlines in the broader energy sector this week.  PCG bounced 13% Friday, but closed the week down 59% vs. last Friday and down 70% in 2019.   Counter-party exposure to the California gas utility operated by PCG seems confined to Kinder Morgan and Pembina Pipeline through Ruby Pipeline ownership and to KMI on El Paso Natural Gas.  Several yieldco’s (remember those?) have exposure to PCG for contracted renewable power.

Midstream corporations outperformed MLPs for a second straight week, and it feels like after the initial bounce in beaten down MLPs or heavily shorted names, it feels like institutional allocations are coming in and they generally have a preference away from MLPs.  Either that, or incremental buyers see the governance issues inherent in the partnership structure, or maybe they just don’t like K-1s.

10-Year Challenge

If you have social media of any kind, you’ve heard of the 10-Year Challenge.  From what I understand, it involves posting a picture of yourself 10 years ago next to a picture of yourself today.

10 years ago, I was living in Boston, with a much smaller and still growing family.  I was preparing to launch an RIA that would manage MLP portfolios on behalf of individuals, which would officially go live on 4/15/09.  I was about 10 months away from registering the domain

10 years ago, MLPs had already bottomed, but would lurch around violently for a few months more before they would join the stock market in its sharp recovery.  In 2008, MLPs had raised $4.8bn in equity in public equity offerings, which is more than we had in 2018.  There were higher yields back then, around 11% in mid-January 2009.  Those yields weren’t as elusive as those we saw the last five years, as distribution cuts in 2009 were limited to a few smaller midstream MLPs.

Today, obviously things have changed quite a bit.  There is more private capital available to support midstream development.  There are more corporations than there were back then.  The investor base is much less dominated by retail investors than it was.  The yields are lower today than they were back then, largely due to distribution cuts and the push for self-funding.

Four Year Challenged: MLP Universe Update

Below I have a tighter and no less dramatic challenge, the 4 years and 2 months challenge.  The significance of the starting date of 10/31/14 is that it is the month right before KMP, EPB and KMR closed their buy-in transactions with KMI, marking the beginning of the buy-in wave that continues to this day.

The columns to the right focus only on midstream MLPs with a $250mm market capitalization or greater and does not include those MLPs with pending buy-out transactions or mergers (DM, AM, ENLK, WES).  It basically whittles down the list of MLPs to those that would be considered investible by an institutional manager with assets at scale.

MLPs are less than half of the market cap of North American Midstream, and the number of MLPs continues to shrink.  This is ultimately a good thing for those public players that remain, who will achieve greater scale and competitive bargaining power.  But it has significant ramifications for the asset managers with funds designed specifically to invest in MLPs.

Money will be in motion from the MLP column over towards the right-hand columns, which is what we’ve seen as an emerging trend early in 2019 with AMNA and AMUS constituents receiving more attention than AMZ constituents from the incremental investor.

Winners & Losers

Notable winners this week included two MLPs with obvious IDR challenges ahead (SHLX and DCP).  MMLP was the biggest winner, perhaps on news of ground-breaking on an ethane export facility in Beaumont (read about it here).  On the downside, well-owned ET was the standout loser this week, as the behemoth continues to struggle to find a fresh bid for its stock.

DCP repeated in the top 5 this week, which helped DCP climb into the top 5 on the YTD leaderboard.  There are only 3 MLPs with negative returns so far this year.

General Partners and Midstream Corporations

The midstream corporation and GP group outperformed the MLP group again this week, with just one stock down for the week.  KMI’s performance this week was salvaged by a Bloomberg report regarding potential sale of the controversial CO2 business.   The stock had been down following earnings.  ENLC, OKE and WMB continued their strong starts and AMGP bounced back.

On the YTD leaderboard, 3 stocks in the group are up more than 20% already, with WMB and PAGP not far off the pace.  Almost the entire group is double digit positive, and TGE is the only negative performer on the year after strong outperformance in December.

Canadian Midstream

Canada was tightly bunched this week, especially among larger names, but the group outperformed MLPs again.  Enbridge and Pembina outperformed on no news, while no news on KML was perhaps a driver of underperformance.

ENB led the way for a second straight week and has almost caught up with TRP for the YTD lead.  Pembina and Inter Pipeline are also both up 15% in a strong bounce back across the Canadian group.

News of the (Midstream) World

Another upsized MLP bond deal, a few small transactions, another MLP cleanup announced and a rumor with a big number attached to the non-midstream portion of KMI’s business.  News flow has felt lighter than usual lately, which has probably contributed to positive performance.

Capital Markets

  • DCP Midstream (DCP) priced an upsized offering of $325mm of 5.375% senior notes due 2025 at 100.75% of par (press release)
    • Notes are an add-on to the existing $500mm 5.375% note offering from July 17, 2018 and upsized from an original $150mm offered

Growth Projects / M&A

  • Phillips 66 Partners (PSXP), Harvest Midstream, and PBF Logistics (PBFX) announced an agreement to jointly develop the ACE Pipeline System (press release)
    • The pipeline will provide crude oil transportation from St. James, LA to downstream refining destinations in Belle Chasse, Meraux, and Chalmette, LA
    • It is expected to have an initial capacity of 400,000 bpd with ability to expand and is expected to be placed in service in H2 2020
  • Kinder Morgan (KMI) is rumored to be considering sale of its CO2 business at a value over $5bn (Bloomberg)
    • This report surfaced around mid-day following KMI earnings release
  • Sunoco LP (SUN) announced the acquisition of the wholesale fuel distribution business from Schmitt Sales and convenience stores from Speedway LLC for a total consideration of $50mm plus working capital adjustments (press release)
    • SUN also announced the sale of an ethanol plant to Attis Industries (ATIS) for $20mm
    • SUN will enter into a 10-year ethanol offtake agreement with ATIS as part of the transaction
  • CVR Energy (CVI) announced it has elected to exercise the right to purchase common units of CVR Refining (CVRR) for $10.50/unit, or $241mm (press release)
    • Purchase price implies a 4.8% discount to prior day close
    • Very sad story for investors in CVRR, which sold off very hard after the announcement of this in 2Q 2018
  • TransMontaigne (TLP) announced meeting date of February 26 for vote on proposed merger with affiliate of ArcLight Energy Partners (press release)


  • Apache (APA) and Altus Midstream (ALTM) announced appointment of Clay Bretches as CEO of ALTM effective immediately (press release)
    • Bretches will also serve on the ALTM board
    • Bretches previously served as the president and CEO of Sendero Midstream since 2014
    • Brian Freed, CEO of ALTM since its inception, will continue his role as APA’s SVP, Midstream and Marketing

Dividend / Distribution Announcements

  • 17 distribution and dividend announcements this week, with 8 increases, 9 held flat and no distribution cuts