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 4^th 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.