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REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: MLPs Lose Week, But Win May

It was a short week with not much news, so midstream and MLPs followed the broad equity market higher.  The melt-up of the broader equity market continued, supported by stimulus and optimism that permeated the markets for most of the week as areas of the country opened back up. 

I still can’t get a haircut here, but from what I understand there are haircuts being done in certain areas of the country, so that’s nice.  

After ripping higher for two months, AMZ has caught up with the broader AMUS index for YTD performance, each is down 30%, including dividends.  AMNA outperformed this week on strength of Canadian midstream, and is only down 26.5%, including dividends.  Utilities roared back this week, outpacing midstream and the market with a 6% gain. 

Not much changed in the energy space week over week.  We moved marginally closer to prices that would encourage more development of shale basins and a restart of the associated natural gas situation.  Oil prices rallied more than 85% in May, with another 6% this week.

“You Said Crossing the Streams Was Bad”

The only notable news related to the rules on river crossings that might have the effect of delaying several pipeline projects.  The 9th Circuit Court of Appeals upheld the ruling made by a Montana District Court several months ago that basically said what Egon said in the film Ghostbusters: don’t cross the streams. 

The hope is that these legal challenges will eventually clear up and then pipeline developers can do what the Ghostbusters eventually did to save the day: cross the streams.

Status Update: They Did not Sell in May…

MLPs had a second straight big month, rallying 9% in May.  It was the second-best May ever (2009 was slightly better).  The S&P 500 had total return of 4.8% in May. 

For the quarter to date, the AMZ has produced 63% total return, which is more than 3x the biggest quarterly return ever for MLPs.  The collapse and rebound has been the shortest and sharpest in both directions ever for the sector.

Looking ahead, the MLP index has historically done ok relative to other months in June, averaging returns of 1.4% and a positive return hit rate of 60%.  After the huge rally off the bottom, it would surprise me to see another month of returns as strong as May. 

AMNA Status Update

AMNA followed up its 30% gain in April with a 7% gain in May.  Very strong returns, but well off the pace of the MLP rebound.  That said, the February and March drawdowns were less for AMNA than AMZ, so AMNA is still well ahead on longer time horizons.

Looking ahead, June has been better for AMNA than AMZ, with positive performance in each of the last 4 years in June (vs. 2 positive years for AMZ). 

Winners & Losers

MLPs

Oil prices rallying into the mid-$30 range appears to have helped G&P players operating in Colorado and Wyoming area basins that are in that second tier of basins.  NBLX, CEQP and DCP fall in that category.  DCP also may have benefitted from a change in outlook from negative to stable at S&P this week, which was probably also tied to oil price improvements.  On the downside, two G&P names that you’d want to own for the natural gas trade (CNXM and MPLX) were weaker this week, as that gas trade may be fading now that oil prices are higher. 

NBLX and NS repeated in the top 5 week-over-week.  PBFX went from near the top to bottom 5 this week, WLKP went from weaker last week to top 5 this week.  On the YTD leaderboard, EVA is closing in on flat for the year.  CQP rallied into the top 5, replacing TCP.  In the bottom 5, DCP exited the bottom 5 group, replaced by CNXM.

Midstream Corporations

While the MLP natural gas players were weaker this week, in the corporation bucket similar names were near the top, including AM, WMB and ETRN.  On the downside, RTLR was an outlier down 9% on no news.

AM repeated in the top 5 and has been among the best performers off the bottom.  TRGP, PAGP and RTLR did not repeat in the top 5, each shifting to the bottom 5 this week.    WMB, KMI and ETRN went from bottom of the group to top 5 week over week.  For the YTD, HESM and WMB remain at the top, but KMI is creeping higher on the list.  No material changes in the bottom 5 YTD.

Canadian Midstream

After laying off much of the Keystone XL risk to the government of Alberta, TRP rallied this week even with the news related to water permits that came down Thursday.  Three Canadian midstream corporations issued fresh debt this week.  Canada outperformed U.S. midstream this week and only Pembina negative on the week.  TRP rebounded from recent underperformance.

TRP went from worst to best week-over-week, PPL did the opposite.  On the YTD leaderboard, TRP took the top spot back from ENB.   

News of the (Midstream) World

Sleepy week again, outside of the notable court decision that impacts development of pipelines (see below).

Capital Markets

  • Pembina Pipeline (PPL-CA) announced sale of $500mm worth of medium-term notes in two tranches (press release)
    • $400mm of 4.67% senior notes due 2050
    • $100mm issued through reopening of 3.71% senior notes due 2026
  • Keyera (KEY-CA) announced offering of $400mm of 3.959% senior notes due 2030 (press release)
  • Inter Pipeline (IPL-CA) announced offering of $700mm of 4.232% senior notes due 2027 (press release)

Other

  • The news of the week in midstream was the decision by the 9th Circuit Court of Appeals, which on Thursday refused to stay the Montana District Court’s ruling that vacated the Army Corps NWP12 water permit for oil & gas pipelines (Bloomberg)
    • The decision will have implications for other pipelines being developed that are relying on NWP12 for their water crossings
    • Keystone XL (TRP), Mountain Valley Pipeline (EQM/ETRN), Atlantic Coast Pipeline (D/DUK) and Permian Highway Pipeline (KMI) appear to be the most at risk projects, with varying expected impacts on timing across the group
  • Williams (WMB) announced plans to develop solar power installations at sites on company-owned land adjacent to certain facilities (press release)