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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Midstream Unchained, MLP Eruption

MLPs followed up last week’s modest bounce with a huge week in a risk-on surge for equity markets, commodity markets and everything else this week.  MLPs led the way for a second straight week, beating the AMNA by nearly 300 basis points. Oil prices, natural gas prices, and the stock market were all strong this week, which helped. 

Monday’s big positive move was helped by an MLP roll-up announcement and TRGP’s positive update.  Wednesday’s big positive move seemed to be short covering after the Vice-Presidential debate where Kamala Harris was emphatic about Biden not banning fracking.  PAA was particularly strong after being pressured as the posterchild for a fracking ban on federal land.

This year, including this week, the AMZ has rallied 8% or more in a week 5 times, reflective of the heightened volatility of 2020.  For context, 2019 had just 1 such week (the first week of 2019), 2017 and 2018 had no 8% weeks.   

AMZ has bounced 11% off the low point of September, AMNA has bounced 6%.  The positive move after the horrible September has been a nice respite, but it does feel like the rest of 2020 will continue to exhibit high levels of volatility in both directions as hedge funds whip things around and investors trade through the election and tax loss season.

Universe Update: Right Now

It’s been a few months since I updated the below chart.  A few notes on the changes in the last few months:

  • CNXM and EQM have exited the MLP structure (although ETRN is still out there)
  • I also moved TCP’s market cap into TRP-CA’s in the chart below and removed it from the MLP count.
  • There are only 28 midstream MLPs left with $250mm or more in market cap.
    • There are 7 midstream MLPs with market capitalizations below $250mm.
    • There are 12 other energy MLPs that aren’t midstream (coal, shipping, minerals).
  • There are only 7 MLPs left with market capitalizations above $5bn (EPD, MPLX, ET, CQP, MMP, PSXP, PAA).
  • TSLA’s market cap of $400bn is larger than the market cap of the entire North American midstream universe.
    • Exercise bike company Peloton has a market capitalization larger than any midstream MLP.
    • Streaming meeting company Zoom (ZM) has a market cap of $140bn, more than all midstream MLPs combined.
  • Expect rationalization and consolidation to continue as the sector struggles to stay relevant.

It’s Got What it Takes…Why Can’t This Be Love?

This week, Eddie Van Halen passed away.  So, I thought it would make sense to tie that into this week’s post.  Rather than make some jokes involving former ET CFO Jamie Welch and the song “Jamie’s Crying” or make the easy connection to this recent bounce to “Jump” or “Eruption”, I’ll make it more personal.

My history with Van Halen starts later than most.  I first became aware of them in 1991 when the band released the album “For Unlawful Carnal Knowledge”.  So, I was never up to speed on the difference between the original band vs. the Sammy Hagar version. I was 10 years old and remember seeing the video for “Right Here, Right Now” on MTV.  It was the one with all the text throughout the video calling out social issues and other random things, some of which feel relevant today, like:

  • Right now, opportunity is passing you by.
    • Non-energy stocks in 2020, but maybe some midstream opportunity too
  • Right now, oil companies and old men are in control.
    • the old men part for sure
  • Right now, pigs are becoming lunch.
    • Those reaching for yield have been slaughtered in 2020
  • Right now, a convenience store is open.
    • Convenience store MLPs have held up ok
  • Right now, your parents miss you.
    • TRP missed TCP so much it bid to bring it back in
  • Right now, its nicer in Cabo.
    • Elsewhere in the stock market in 2020
  • Right now, forces are aligning against you.
    • ESG, fund flows, tax loss selling, oil prices, etc.
  • Right now, there are people doing it for the money.
    • Executives continue to do quite well even as energy stocks struggle (WSJ Report)
  • Right now keeps going.
    • Time marches on and eventually some of the external headwinds facing the midstream space will abate.

I liked the song so much that I tried to buy the CD, but I was such a noob about music that I ended up buying the single “Right Here, Right Now” by Jesus Jones, an epic fail.  Eventually, I bought the right CD.  The Right Now video was such a hit that Pepsi used the concept and song to launch “Crystal Pepsi” in 1993.  That commercial was then spoofed by Saturday Night Live in an absurd version about “Crystal Gravy”.

Winners & Losers

MLPs

CEQP won the week with a 20%+ gain this week, perhaps helped by the guidance update from fellow Bakken operator TRGP.  TCP traded through its implied deal price on the expectation that the bid from its sponsor TRP announced this week will be sweetened.  Other G&P MLPs DCP, WES and MPLX were also up double digits in a good week for upstream-oriented G&P names.

MPLX went from bottom 5 to top 5.  On the YTD leaderboard, DKL became the third MLP to turn positive for the year.  NGL rejoined the bottom 5 after lagging this week.

Midstream Corporations

TRGP’s update on guidance and the authorization of a buyback program put a floor in the stock and helped it win the midstream corporation group by a wide margin this week.  Other more upstream-focused names comprised the rest of the top 5, including AM, ENLC and HESM.  The bottom 5 was mostly names you’d rotate out of if you were trying to get more exposure to a recovery in deeply discounted midstream names.

LNG and WMB repeated near the bottom of the group, and KMI lagged as well, in a rotation out of gas names into G&P and oil names.  ENLC, TRGP and OKE repeated near the top.  On the YTD leaderboard, AM leapfrogged WMB into the top spot.  On the downside, TRGP jumped two spots over RTLR and OKE.

Canadian Midstream

Canadian midstream rallied across the board this week, but the rally was a bit more subdued, as you’d expect.   TRP outperformed ENB, with the market responding favorably to the roll up of TCP that will simplify the structure and get TRP more U.S. gas pipeline exposure. 

Keyera repeated as the top name in Canada this week.  ENB was again near the bottom.  On the YTD leaderboard, Gibson extended its lead on the group, not much movement otherwise.

News of the (Midstream) World

Quite a bit of news action this week, including another opportunistic MLP roll up and some management changes.  On the negative side, it was reported that one of the few utilities that appeared to still be interested in accumulating midstream assets appears to be contemplating an exit of their portfolio.  This would take another potential buyer out of the market for consolidation down the road.

Capital Markets

  • Targa Resources (TRGP) announced a share repurchase program authorization of up to $500mm, effective immediately (press release)
    • TRGP also announced updated expectations to hit the high-end of 2020 guidance (revised lower earlier this year) and to hit the low end of capital expenditure guidance

M&A / Growth Projects

  • TC Energy (TRP-CA) announced bid to exchange all outstanding units of TC Pipelines (TCP) it does not already own in exchange for 0.65 shares of TRP for an implied price of $27.31/unit (press release)
    • Price implies 7.5% premium to 30-day price, 5.4% premium to prior closing price
    • The transaction will result in 13% reduction in income for TCP unitholders due to the stealth distribution cut
    • TRP owns 24% of the common units and TCP’s IDRs, which are out of the money
    • Transaction will be taxable event for TCP unitholders
  • Bloomberg reported that midwestern utility and gas infrastructure company DTE Energy (DTE) is considering a sale or spin off of its natural gas pipeline and other non-utility operations (Bloomberg)
    • DTE acquired Marcellus gathering assets from M3 Midstream for $1.3bn in 2016
    • DTE acquired Haynesville gathering assets from M5 Midstream for $2.25bn in 2020
    • DTE also owns 50% of Nexus Gas Transmission, owner of the Nexus gas pipeline, along with partner Enbridge (ENB)
    • The Nexus interest could make sense for ENB or some private infrastructure entity to acquire, but the disparate gathering portfolio will be more challenging to offload
    • Allison Good followed up with a good article on the subject featuring quotes from myself (S&P Global)

Other

  • Energy Transfer (ET) announced management changes, including that CEO Kelcy Warren will step down as CEO of ET at year-end (press release)
    • President and Chief Commercial Officer Mackie McCrea and CFO Tom Long will serve as Co-CEOs starting in 2021
    • Warren will remain Executive Chairman and offer this quote in the press release, “Although I am stepping away from the day-to-day management of our business, I will continue to be intimately involved in the strategic growth of Energy Transfer.”
    • This is not a huge change, it effectively takes Warren out of the public spotlight on conference calls and in meetings with investors, which may be a marginal positive, but he will remain in control given his large equity stake and role at the board level
    • The first big strategic decision for the new CEOs may be whether to cut the distribution or not, but that decision ultimately will rest with Warren and the board.
  • Plains All American (PAA) announced distributions for PAA and PAGP of $0.18/unit, the same as last two quarters after a cut in 1Q (press release)
  • Noble Midstream (NBLX) announced management changes and changes to the board following the closing of the merger of Chevron (CVX) and Noble Energy (NBL) (press release)
    • Robin Fielder has been appointed CEO of NBLX
    • NBLX replaced several legacy NBL board members with several Chevron representatives