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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: MLP Erosion Resumes

Stocks of all types were negative this short week (even utilities, barely), so despite a rally in commodity prices and a further drop in interest rates, midstream stocks were negative.  MLPs were down for a 4th week in the last 5 weeks and were again the worst performing group in midstream. 

Inventory reports were positive for both oil and natural gas prices this week, lifting the commodity complex.  But that enthusiasm did not transfer over to energy stocks.  Disappointing earnings results and 2020 outlooks among MLPs reporting this week appeared to drive the performance divergence. 

MLPs like CEQP, ENBL, GEL and ET traded poorly after results, while TRGP posted very strong results and a solid 2020 outlook and traded very well, and it was a similar outcome for WMB but with a smaller rally.  Results like TRGP have been the rare exception in this interminable earnings season, which will finally wrap up next week with OKE, LNG, Pembina, ENLC and WES reporting, among a few others. 

MLPs: A Link to the Past

The original Nintendo version of the Legend of Zelda was released on 2/21/1986, 34 years ago this week.  I was never very good at the game as a kid, but when it became available in my kids’ Nintendo DS several years ago, and with the help of free walkthroughs on the Internet, I was able to beat the game. 

But back when I was a kid and had no idea what I was doing, my health meter would often be very low, and the low health panic sound would often be braying in the background as I frantically wandered around trying to survive.  Stumbling upon a fairy fountain and regaining full health was always such a relief.

I have strong feelings of nostalgia for a time when video games had 8-bit graphics and were played with just 2 buttons.  I also have strong feelings of nostalgia for a time when MLPs traded better, like most of you.  It would be great if MLPs stumbled upon a magical fairy that could wave her wand to repair negative sentiment, levered balance sheets, low commodity prices and overheated competition. 

What positive catalysts could emerge to change the current trend?

  • For natural gas prices, hope lies in a combination of: (1) natural decline curves from lack of investment that reduce supply, (2) more stringent regulation on flaring in Texas (seems unlikely), and (3) ramping demand globally (more of a long-term driver).
  • For oil prices, hope lies in (1) capital discipline among major producers globally, (2) rising full cycle cost of production over time (including cost of capital), and (3) emerging markets growth supporting demand.
  • For energy stocks, hope lies in all the above, plus valuations too attractive to ignore at some point.
    • Also, perhaps a total resolution of the China virus situation that allows for a complete and speedy ramp back up of the economy.
  • For MLPs, hope lies in yields on distributions that are proven to be sustainable after 120+ cuts across the sector, and in the eventual return of retail investors.

Nostalgia and hope aren’t cutting it for MLPs.  On the ET earnings call this week, Kelcy Warren said, “Pipelines are really interesting. If you’re not spending money on those assets, then you’re deteriorating, eroding. And so you can’t just stop [spending].”  Similarly, MLPs will continue to deteriorate without a change in the fund flow trajectory. 

Winners & Losers

MLPs

YTD laggards SMLP and EQM showed signs of life this week on what appeared to be short covering on no real news.  USAC posted a good quarter and healthy guidance, which helped it land in the top 5.  PSXP continues to be a name that is flocked to in volatile times for other MLPs. 

The biggest loser in MLPs this week was GEL, which reported 4Q results that were good, but the market was not pleased with 2020 guidance that indicated much softer Soda Ash results going forward.  The stock was down 20%.  ENBL also reported and sold off on a weaker outlook.  CEQP reported increase in capex that surprised the market, even though at least half of this increase was due to timing of last year vs. this year spend.

GEL went from top 5 last week to bottom 5 this week.  NRP and SMLP went from bottom last week to top this week.  On the YTD leaderboard, ARLP and GEL joined the bottom 5, replacing EQM and SMLP.  CAPL took over the overall best performance spot, while NS dropped to 5th.  PBFX joined the top 5.

Midstream Corporations

Similar to the MLP group, short covering among poor YTD performers seemed to drive up stocks of AM and ETRN to lead the midstream corporation group this week.  TRGP posted blow-out results and strong guidance that helped it rally.  RTLR was up after reporting results.  No news among the rest of the top and bottom 5.

AM went from worst last week to first this week.  KMI repeated in the top 5, while ENLC and LNG repeated in the bottom 5.  On the YTD leaderboard, KMI and OKE remain in the top spots and are two of the three names in this small group to be positive YTD.

Canadian Midstream

Canadian midstream was more mixed than usual this week, with TRP leading the group and ENB lagging.  Inter Pipeline reported results Friday and underperformed afterwards.  Canada remains much less volatile than MLPs and smaller U.S. corporations.  Canada continues to benefit from greater relevance within the Canadian stock market, and from a sterling track record that includes no dividend cuts in more than a decade.

On the YTD leaderboard, ENB slipped a few spots, relinquishing its overall lead back to Pembina.  IPL remains the worst performer in the group.  IPL is still working on selling out of its European storage business, but management had no strategic update on the earnings call.  Pembina and Keyera report next week, which may drive some divergence in performance in this group late next week.

News of the (Midstream) World

It was a quiet week of transactions.  Aside from the PSXP and RTLR transactions, there were several press releases announcing customer agreements, which rates pretty low on the newsworthy scale.  This week was all about earnings releases.

Capital Markets

  • Tallgrass Energy (TGE) priced an offering of $430mm of 6.000% senior notes due 2027 at 98.591% of par (press release)

Growth Projects / M&A

  • Phillips 66 Partners (PSXP) announced the acquisition of a 50% interest in Liberty Pipeline from Phillips 66 (PSX) for $75mm (press release)
    • The 24-inch pipeline will provide crude oil transportation service from the Rockies and Bakken production areas to Cushing, OK
    • The project is expected to cost $1.6bn overall, with $800mm net to PSXP, and the $75mm to PSX is to reimburse PSX for costs incurred to date
  • Rattler Midstream (RTLR) acquired a 50% equity interest in Amarillo Rattler, a 50/50 JV with Amarillo Midstream, a portfolio company of ArcLight Capital (press release)
    • The JV owns and operates the Yellow Rose gas gathering and processing system with a total processing capacity of 40 MMcf/d and over 84 miles of gathering pipelines
    • The JV intends to construct and operate a new 60 MMcf/d cryogenic natural gas plant expected to be in service in mid-2021
  • Shell Midstream (SHLX) announced that its Amberjack Pipeline executed agreements with Chevron (CVX), TOTAL, and TEP Anchor for the export of crude production with first oil anticipated in 2024 (press release)
  • NGL Energy Partners (NGL) announced new acreage dedications for produced water transport and disposal (press release)
  • Energy Transfer (ET) announced a multi basin strategic alignment with an investment grade integrated energy company in which the agreements will increase and extend long-term commitments between the company and ET in the Eagle Ford and Delaware Basins through 2034 and 2040, respectively (press release)