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CBRE GLOBAL INVESTORS

CBRE Global Investors, combined with CBRE Clarion Securities and CBRE Caledon, is one of the world’s leading real asset investment managers providing real estate and infrastructure investment solutions to over 500 clients worldwide.

CBRE GROUP

CBRE Global Investors is the investment management division of CBRE Group, Inc. the world’s premier commercial real estate services and investment firm.  The company’s shares trade on the New York Stock Exchange under the symbol “CBRE.”

REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: MLPs Brace for Earnings

Midstream was negative across the board this week, and the MLP Index lost more ground to the other midstream indexes that include corporations.  Lower oil prices, higher interest rates and general aversion to energy stocks were likely reasons for continued weakness for the sector.  Reported progress on China trade discussions buoyed the market towards the end of the week, which helped stop the bleeding.

This was the third straight negative week for midstream and MLPs.  The MLP Index is down 7.1% and the AMNA is down 4.7% over that stretch.  The MLP Index is now flat on price basis YTD and down 18% year over year, (-11% counting that yield that’s so attractive).  Recent weakness has lowered already low expectations for 3Q earnings, which kick off this Wednesday with Kinder Morgan.

Earnings Questions: Ask the Magic Eight Ball

A friend of mine sent me the following text this week: “Dude, this is so depressing. Is there an environment in which the MLPs go up?”

My tongue-in-cheek response: “Sources say no. Ask again later. Outlook not so good.” In other words, three standard responses from the classic Magic Eight Ball toy (inducted into the toy hall of fame last November, FYI). In that spirit, below is a quick rundown of some of the forces at play as we head into another round of quarterly updates from the midstream sector.

Fundamental Outlook: “Better Not Tell You Now”. The setup for midstream fundamentals heading into earnings isn’t great.  Oil and natural gas rig counts are down big year over year.  Production is still growing, but growth is slowing and will continue to slow.  Differentials have tightened with new pipelines coming online for natural gas and oil transportation, limiting marketing opportunities that pumped up results earlier this year.  As far as outlook for next year, midstream companies are unlikely to discuss much this quarter before producer development plans are firmed-up.

Capital Discipline: “Signs Point to Yes.” As projects are being placed into service, cash flow from those projects will be coming online, helping to offset some lost commodity or spread gains.  Capital backlogs are draining slowly, setting up for visibly lower leverage and free cash flow over the next few years.  

Access to Capital: “My Reply is No.” Fund flows into midstream products that can be tracked have been negative.  Anecdotally, institutional allocations to midstream are being reduced or eliminated, replaced by private equity or other real assets within their portfolios. Private equity interest in midstream assets is still there, and should offer the midstream sector access to some capital where self-funding hasn’t yet been achieved.  But interest from private equity appears to be waning after reported challenges with precedent midstream investments, as evidenced by OXY announcing its intent to hold onto its stake in WES for now after shopping it around.

Regulatory Outlook: “Concentrate and Ask Again”.  Major midstream projects are facing active opposition, but processes to resolve impediments are underway (progress on Line 3 and ACP in recent weeks).  The big unknown from a political / regulatory perspective is the 2020 election and potential fallout if the Democratic nominee unseats the current President.  There is also the longer-term challenges the industry is facing from an investment community more concerned than ever about ESG and the environmental impact of the energy industrial complex (including midstream).

Broad Market and China Trade War: “Cannot Predict Now”.  If the broad market holds up and progress is made on a trade deal, expect the market to hold up better than 4Q of last year, and expect midstream to trade better than it has recently.  Global demand for excess U.S. supply of hydrocarbons is in question, and some of the uncertainty is the result of the ongoing trade war uncertainty.

Winners & Losers

Tightness in tanker rates pushed shipping MLPs higher this week.  The 5 best-performing MLPs were all not members of the Alerian MLP Index and 4 of those own and operate marine transportation assets.  Tightness has been driven by sanctions on two major Chinese shipping companies and also by a missile attack off the coast of Saudi Arabia this morning.

On the downside, HEP was among the worst performers after a filing last Friday indicated loss of a volumes starting in March from a contract with Delek subsidiary that was not fully renewed (see 8-K here).  HEP has been trending lower since being removed from the index that large ETF AMLP tracks a month ago.  HEP likely requires some assistance from sponsor HollyFrontier (HFC) over the next 6 months to replace that income, given tight distribution coverage.  Another trend among the big losers was gathering and processing MLPs, with 3 in the bottom 5 this week (DCP, SMLP, ENBL).

TGP went from last place a week ago to first place this week.  SMLP repeated in the bottom 5 this week.  Poor action this week has dropped HEP into the bottom 5 of the YTD leaderboard, replacing CINR.  NGL dropped to fifth in YTD performance from the top spot, and PSXP replaced CEQP in the top 5.

Midstream Corporations

Strength in NGL prices appears to have helped AM rebound this week to lead all midstream corporations by a wide margin this week.  Cheniere was another outperformer, helped Thursday and Friday by better headlines and broad market enthusiasm for U.S./China trade relations.  TGE traded off hard this week on news of lower rates on Pony Express that in a void of updates on the Blackstone bid led to heavy selling. 

PAGP and ENLC repeated in the bottom 5 this week, as expectations for 2020 outlook for both continue to fade.  ETRN also continues to trade relatively better in recent weeks.  KMI reclaimed the top spot on the YTD leaderboard after OKE weakness this week.

Canadian Midstream

ENB was the big winner in Canada, benefitting from a broker upgrade mid-week and corresponding downgrade of TRP.  Inter Pipeline traded up after two very negative weeks, which may signal an end to the big selling pressure after the rejected takeout bid from over the summer.

On the YTD leaderboard, Enbridge broke back above 20% return.  All other stocks in Canada except KML have produced 25%+ returns YTD in U.S. dollar terms.

News of the (Midstream) World

Much lighter week of news after the flurry last week.  We may get updates on some of the ongoing strategic processes in the sector in the upcoming week, but for sure KMI reports earnings to kick off earnings.

Capital Markets

  • None.

Growth Projects / M&A

  • Tallgrass Energy (TGE) announced a binding open season for Pony Express Pipeline expansion capacity from Wyoming to the McPherson refinery in Kansas (press release)
    • This comes in addition to last week’s open season with Cushing, OK as the destination
  • TC Energy’s (TRP-CA) Coastal GasLink project has drawn interest from Mubadala and other suitors (Bloomberg)
    • The natural gas pipeline is estimated to cost US$4.7bn to build
  • Reuters reported that Occidental Petroleum (OXY), the general partner of Western Gas (WES) plans to hold onto its interest in WES until next year after announcing a strategic review earlier this year (Reuters)

Other

  • A Delaware Judge rules that Loews must face lawsuit that claims Loews intentionally tanked the price of BWP so it could buy it back in on the cheap (Bloomberg)

Distribution / Dividend Announcements

  • Distribution / dividend announcements are starting to trickle out.  No surprises so far.