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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

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Week Thoughts: MLPs Flat as Market Broods

In a negative week for the stock market overall, midstream outperformed, led by MLPs and U.S. corporations, which finished essentially unchanged.  Canadian midstream pumped the brakes this week, adjusting to the reality of the latest oil pipeline project delay.  Interest rates were lower, supporting utilities, which outperformed.

Most Texas school district are on Spring Break this week, which means many of the energy executives, bankers, and attorneys with school-age children are taking the week off as well.  Historically that has made for slower transaction activity.  Also, earnings season is over.  That combination means company-specifics may take a back seat to factors outside of midstream.

While macro issues didn’t really move midstream that much this week, the below positive and negative issues have popped up and may influence the next big move for midstream, up or down.

  • China trade deal
    • S. LNG is reported to be a major part of the trade negotiations between China and the U.S. over trade.
    • If this trade deal ever gets over the line, expect Cheniere and the burgeoning U.S. LNG export business to benefit.
  • Norway’s sovereign wealth fund divesting E&P
    • These sales are being done to reduce risk of too much energy exposure for a country that has plenty of exposure to oil prices already.
    • But wholesale selling of energy stocks for reasons other than correlation, like the movement towards Environmental, Social & Governance (ESG) investing, is worth closely monitoring.
    • Energy (and midstream) stocks may struggle to find a place in an ESG-focused world, reducing the global investor pool over time and perpetuating discounted valuations.
  • Colorado drilling regulations gaining momentum
    • While the DJ Basin is not a major driver of U.S. supply growth overall in comparison to the Permian Basin, there is substantial midstream infrastructure in place serving Colorado
    • If upstream investment is directed away from Colorado, there could be a persistent overhang for those midstream operators with the most exposure to the region.
  • Majors pushing hard in the Permian
    • Major integrated oil companies Exxon and Chevron announced bigger and faster production growth plans for their Permian acreage, positive for midstream.

Of course, some stock-specific trends will continue to matter.  High IDR takes, high leverage, high payout ratios need to be resolved.  Also, oil prices remain a wild card, like always.

MLPs 77002

This week, people of a certain age were hit pretty hard by the news that Luke Perry passed away at 52 years old.  I always found noteworthy Perry’s reaction when asked about Beverly Hills 90210 in interviews 10-15 years after his starring role on the show.  His response typically was something to the effect of: “I was a kid, it was a million years ago, it’s like me asking you about third grade.”

Perry was 23 years old when he landed the role of a brooding high school student in the early 1990s TV show, so not exactly in third grade, but I can appreciate his forward-looking focus.  Rather than live in the past and hope for a 90210 re-boot or nostalgia tour, he kept working as the industry evolved.  TV changed from prime time, 30 episode seasons of teen soap operas on major networks to binge streaming 13 episode seasons like the Netflix show he was on at the end.

These days, it can seem like a million years ago that MLPs were almost as cool as Perry’s character Dylan Mckay, when MLPs consistently outperformed the rest of the stock market and churned out new MLP IPOs every 6 weeks.

I am obviously one of the most nostalgic when it comes to the history of the pipeline business in North America.  But MLP and midstream management teams today should not live in the past.  The winners this year and going forward will be those who can adjust to the times that call for more durable business models (and no IDRs).

Winners & Losers

No news among the winners this week. TCP, CEQP May have benefitted from another rebalance and up-weight in MLP Indexes. EQM recovered from last week’s reaction to the legal setback for the Atlantic Coast Pipeline and read through to MVP.  EQM management was pretty vocal and confident on an administrative solution to the issue.

3 of the bottom 5 this week have IDRs (BPMP, DCP, CNXM) and those IDRs are being called out by sell side analysts more frequently the longer the IDR solutions take to present themselves.

GMLP bounced back from last week like EQM, while TOO did not and finished in the bottom 5 again. On the YTD leaderboard, TOO took over the bottom spot from EQM.  At the top of the leaderboard, NGL was little changed and is still on top at 40%. NS and TGP replaced CAPL and USAC.

Midstream Corporations

Cheniere caught a bid this week to lead the midstream corporation group this week, after a report over the weekend on how Cheniere will benefit from a trade deal with China, and also continued positive development updates on its latest trains. ETRN, like EQM above, also bounced back. On the downside, many of last week’s performers repeated in the bottom 5 this week.

On the YTD leaderboard, TRGP dropped out of the top 5, and Cheniere climbed out of the bottom 5. Median returns in this group are well below midstream returns, largely because the biggest names that drive index returns are performing the best.

Canadian Midstream

Canadian midstream corporations reacted pretty rationally to a delay in Line 3 delay. ENB was near the bottom, but recovered for most of the week (until Friday) after Monday’s big decline on the Line 3 news. Gibson Energy outperformed after reporting strong results and also is a potential beneficiary of a delay in oil pipeline egress with its storage capacity.

Keyera is a purely Canadian gathering and processing company, so a delay in oil takeaway capacity solutions may lead to lower activity and volumes, which may have led to weakness this week. On the YTD leaderboard, Keyera retained its lead on the group, ENB dropped a spot.

News of the (Midstream) World

Pretty quiet on the midstream news front this week, and the relative calm may be helping relative performance.

Capital Markets

  • No deals, but to fill out this section, see below for some obscure statistics on MLP and GP IPOs:
    • March has historically not been very active even back when equity capital markets were opened. Since 1990, there have been 166 MLP and GP IPOs, and of those only 3 priced their IPOs in the month of March (EOTT in 1994, CQP and CPLP in 2007)
    • Second least active month for MLP and GP IPOs is August at 9, while October and November have the most at 19 each

Growth Projects / M&A

  • Cheniere announced substantial completion of Train 1 at Corpus (press release)
    • Cheniere noted this facility is the first greenfield LNG export facility to be placed into service in the lower 48 states of the U.S.
  • Cheniere also announced substantial completion of Train 5 at Sabine Pass (press release)
  • GasLog Partners (GLOP) announced $214mm drop-down acquisition from sponsor GasLog Ltd. (GLOG) (press release)
    • Purchase price represents 9.1x next twelve months EBITDA

Other

  • Norway’s $1 trillion Sovereign Wealth Fund plans to divest $8bn worth of “E&P” companies in its portfolio, in an effort to reduce risk to oil prices (BBC)
    • Liam Denning has a great piece discussing the laughable hypocrisy in picking these out of the $37bn total portfolio of energy stocks by relying on the distinction as E&P companies vs. integrated oil companies (Bloomberg)
    • Notable stocks on the divestment list that are actually midstream companies: Cheniere (LNG), Keyera (KEY-CN) and Targa (TRGP)
  • Cheniere reported to be a major beneficiary of a potential trade deal with China (Wall Street Journal)
  • Alerian announced some changes in its indices listed below in addition to others:
    • EQM Midstream (EQM) will be added to the Alerian Midstream Energy Select Index (AMEI) (press release)
    • Antero Midstream Partners (AM) and Antero Midstream GP (AMGP) will be removed from the Alerian MLP Index (AMZ), also AM will be removed from the AMZI index (press release)
  • Delek Logistics (DKL) announced Assi Ginzburg will succeed Kevin Kremke as CFO (press release)
    • Ginzburg has been Delek US’s EVP, Strategic Planning since June 2017