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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Midstream Week Thoughts: Minority (Owners) Report

There was little need for Midstream and MLPs to show off their recently acquired defensive skills this week.  U.S. stocks had their best week of 2019, trading up on hopes of future interest rate cuts to save the day.  U.S. midstream corporations (AMUS +2.9%), especially those in the S&P 500, outperformed MLPs and Canadian Midstream.

Commodity price concerns shifted from oil prices, which stabilized after reached a 4 month low on Wednesday. Concerns have shifted back to NGL and natural gas prices, which both hit YTD lows this week.  While midstream companies and MLPs have cleaned up much of their direct commodity exposure in recent years, there is still shadow exposure buried within the big NGL players that’s warrants some concern at these low prices, even if it will “price to export”.

Minority (Owners) Report: Office of MLP Pre-Crime

Minority report was a 2002 film, but the concept came from a short story published 46 years earlier by science ficion author Philip K. Dick, also author of Total Recall, Blade Runner and The Man in the High Castle.

The film explores pre-destiny vs. free will.  It stars Tom Cruise as a top agent responsible for stopping the crimes after they’ve been envisioned, but before they happen.  At some point, Cruise’s character becomes the target and he runs.  The tagline for the film is “everybody runs”, referring to what happens when the pre-crime officers come after those expected to commit a crime.

Pre-Crime has some parallels to MLPs today.  At the MEIC conference a few weeks ago, I sat in on multiple meetings where the issue of IDR simplification dominated the discussion, even for MLPs early in the IDR lifecycle.  Management teams seemed frustrated with the focus on IDRs and seemed to feel everyone was running from their stock.

Are some MLPs being accused of a crime they have yet to commit: a future dilutive IDR takeout?  The unfortunate part is these management teams tend to be powerless employees of much larger sponsor organizations.  IDR simplification or a sale (potentially for WES, NBLX) doesn’t happen until the sponsor/G.P. owner decides it will happen.

Investors are tired of the delicate dance whereby IDR owners wait until the IDR cash flow is meaningful before removing IDRs in a transaction that inevitably comes at a higher cost for L.P. unitholders than it would be to clean up the structure today. 

One way to ensure minimal cost to L.P. unitholders is to clean up the untenable structure before it is an issue.  The crime, in the eyes of today’s potential incremental MLP investor, has already been committed by allowing the IDR structure to persist at any level.  Should MLPs with strategic overhangs be avoided entirely?  Can anything break the wheel?

See below chart for some of the MLPs with IDR structures still in place and their respective IDR payments as a percentage of their current distributions. 

Some of the names with high IDR takes have outperformed in 2019, attracting investors willing to bet on a positive resolution to the structure in exchange for a high yield or exposure to an attractive pool of assets.  So, not everyone has pre-judged this group.  In the poll question below, we take your pulse on the subject.


MLPs with obvious structural overhangs should be:

  • Pre-judged and avoided (76%)
  • Presumed innocent (24%)

Total Voters: 120

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Winners & Losers

Among the top 5 MLP performers this week, only CQP had news (FID of Sabine Pass train 6 and run-rate guidance update).  SHLX was the only bottom performing MLP with news (open season at lower rate and shorter term).  GLP led all MLPs and MMLP was the worst for the week.

NBLX went from bottom 5 to top 5 week over week.  On the YTD leaderboard, GLP’s big week pushed it int the top 5.  CNXM climbed one spot to 5th worst performing MLP this year.

Midstream Corporations

Median return among midstream corporations was far ahead of the MLP Index return this week. Cheniere’s investor day helped it post the best return.  Cheniere had a positive update that included a large buyback authorization and no dividend (yet).  Large cap S&P 500 members WMB and KMI were strong in a very strong week for the S&P 500 overall.  Only three names in the group were negative, including three that are either in the MLP Index (ENLC and TGE) or owns equity in a member of the MLP Index (EQM).   TRGP underperformed, perhaps on fresh lows for NGL and gas prices.

ALTM and AM bounced back from the bottom of the group last week to near the top this week.  TRGP and SEMG repeated near the bottom.  KMI repeated among the top 5.  On the YTD leaderboard, AM rejoined the top 5, and LNG climbed out of the bottom 5 (replaced by TRGP).

Canadian Midstream

Canada underperformed overall this week, dragged down by ENB’s weakness following the adverse ruling in Minnesota regarding the EIS for its epic Line 3 project.  TRP outperformed, perhaps on rotation from ENB.  Gibson, whose primary business is oil storage in Canada that benefits from lack of takeaway, outperformed too. 

Other intra-Canada players (Keyera, Pembina, Inter) did not seem impacted by what is a more uncertain production growth outlook with Line 3 uncertainty, at least not yet.

ENB made it two straight weeks at the bottom of the Canadian group.  On the YTD leaderboard, ENB dropped another spot, but is still +17.8% YTD.  TRP broke 40% total return.

News of the (Midstream) World

Not a huge week of news, with the regulatory news in Minnesota the biggest sector-wide piece of news that impacts upstream activities in Canada and potentially downstream pipeline optimization in the U.S.  Also, two large project FIDs were formally announced this week, although neither came as a surprise.  In the capital markets, selling unitholders look to drive equity transactions near-term (as opposed to primary issuance), and more units were registered this week by potential sellers.

Capital Markets

  • MMLP registered 6.1mm units for holders (S-3)
    • Units are owned by Martin Resource LLC, Cross Oil Refining & Marketing Inc. and Martin Product Sales LLC and represent 15.7% of outstanding L.P. units

Growth Projects / M&A

  • Cheniere (LNG) made several announcements and updates during its analyst day including:
    • Made a positive financial investment decision (FID) on Train 6 at Sabine Pass (press release)
    • Authorized of three-year, $1bn share repurchase program
    • Increased run-rate production guidance to 4.7-5.0 Mtpa per train, up from 4.4-4.9 Mtpa
    • Signed a 15-year gas supply agreement with Apache (APA) in which APA will sell 140,000 MMBtu per day of natural gas to LNG (press release)
  • MPLX, WhiteWater Midstream, and Stonepeak/WTG reached an FID to move forward with the Whistler Pipeline Project (press release)
    • Whistler is designed to transport 2 Bcf/d of natural gas through 475 miles of 42-inch pipeline from Waha, TX to the Agua Dulce area in South Texas
    • Expected to be in service by Q3 2021
  • Kinder Morgan (KMI) announced a delay in the startup of its Elba Liquefaction export terminal as it continues to experience unspecified problems during commission (S&P Global)
  • Shell Midstream (SHLX) announced successful open season for Zydeco Pipeline, with full capacity take up at significantly lower rates and shorter term (press release)

Other

  • Minnesota Court of Appeals ruled Enbridge’s (ENB-CA) environmental impact statement for proposed Line 3 Replacement project inadequate (Reuters)
    • Court ruled that MN Public Utilities Commission EIS approval was unsupported by “substantial evidence” and failed to account for how a potential oil spill would impact Lake Superior
  • New Jersey regulators denied permits for Williams’ (WMB) Northeast Supply Enhancement project, but will allow WMB to adjust plan and re-apply (AP)