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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: MLPs Ramp into Earnings

MLPs resumed their October rebound this week with their best week since early August.  Energy stocks outside of midstream also had a strong week on the back of merger mania in upstream with another E&P merger announced this week and others rumored.  

So far, consolidation hasn’t made its way into the midstream sector, and management teams don’t appear to be in a hurry to announce mergers in this environment unless they are leverage neutral, which is difficult given elevated leverage for most discounted midstream names. I’d love to be wrong and see vigorous consolidation come to midstream, because consolidation or rationalization is necessary to re-balance the bargaining power of the midstream providers, especially if major customers are merging with each other.

Earnings season kicked off this week KMI, with some positive commentary on activity levels in the Bakken seeming to have a positive readthrough to stocks operating in that region.  Refined products demand recovery remains challenged, especially for jet fuel, due to the ongoing limited economic activity around the globe.  As you’ll see in the charts below, those cross current were reflected in stock performance this week, with upstream-oriented stocks trading well while refined products focused stocks underperformed.

We get more earnings next week that will confirm or challenge those initial readthroughs. EPD, OKE, MMP, TRP, SHLX, PSXP, CEQP, and HESM all report next week.

October Paying Dividends

As noted above, this was the best week for MLPs since early August when MLPs rallied 6% in a week.  That week, AMUS also rallied hard (+5.0%), but this week’s rally was more MLP-focused.  This week’s action also was less driven by the broad market or oil prices, both of which were down this week.  

In the post a few weeks ago, I highlighted the typical seasonal strength MLPs usually see in October.  With yields higher today than in recent years, the distribution capture trade each quarter can be magnified.  With distribution announcements rolling in and ex-dates not starting until next week, this time period is the sweet spot when fund outflows have lightened up and the stocks ramp into the distribution payments.

This phenomenon is also helped by the awful performance by midstream in September.  The MLP Index entered this month with its highest nominal yield for a month ever at 14.7%, reflecting maximum pessimism, but also limited usefulness of yield as a valuation metric in light of the 130+ dividend cuts we’ve seen in the last 6 years. 

The action in September and October this year is similar to action in 2015, when September saw the AMZ decline 15% (vs. -13.6% this year).  October 2015 saw MLPs rally 9.7%.  October to date this year, AMZ is up 13.0% already.  That strong October in 2015 was followed by 4 consecutive negative months of stock performance, so be wary of head fakes.

But for now, the stormy weather for midstream has cleared allowing for a much-needed few weeks of smooth sailing for midstream stocks, allowing for some bottom fishing.

Winners & Losers

MLPs

HMLP and ARLP led the way this week by a wide margin.  ARLP may have been helped by stronger natural gas prices.  HMLP’s distribution announcement last Friday was probably the catalyst there.  Beyond those top 2, three gathering & processing names round out the top 5, each up 10%+.  On the downside, three refinery-sponsored MLPs were in the bottom 5, as those continue to be challenged by the challenges faced by refineries in this environment.  Other more stable names like TCP and EVA were also weak, likely due to rotation into names that have been sold hard YTD.

DKL repeated in the bottom 5, DCP repeated in the top 5.  On the YTD leaderboard, CAPL crept back into the top 5, displacing another convenience store MLP (SUN).  Not much change in the bottom 5.

Midstream Corporations

ENLC beat others in this group in a strong week for high yielding midstream names generally.  ENLC announced a flat distribution this week.  OKE maintained the dividend and the market reacted very positively on Thursday, perhaps also helped by some hope on Bakken activity.  Cheniere lagged even as the global natural gas price situation appears to be firming, which may have to do with the lack of a dividend in a strong week for high yield midstream stocks. 

Cheniere weakness this week also comes after strength last week.  HESM and RTLR went from top of the list to closer to the bottom this week.  YTD leaderboard looks about the same, with AM the only positive name and WMB back to down less than 10% (including dividends).

Canadian Midstream

Canadian midstream underperformed U.S. midstream this week, with just 2 positive names out of 6.  Seems to be some rotation at play here into cheaper MLPs, or just a preference in distribution season for U.S. stocks over Canadian ones.  Gibson was the worst performer in the group after outperforming all year, which feels like investors selling relative winners to pick up discounted names.

Week over week, the winners and losers basically switched, with GEI going from first to worst followed by ENB and TRP.  Pembina was a relative winner in both weeks, but it remains beaten down overall this year.  YTD, no changes to the order with Gibson and the two big names outperforming and the producer facing midstream names underperforming.

News of the (Midstream) World

A tiny, sponsored coal MLP announced a bid from its sponsor, which should result in another name gone from the universe.

Capital Markets

  • None.

M&A / Growth Projects

  • MPLX announced extension of open season for proposed expansion of SLC Core Pipeline System (press release)
  • CONSOL Energy Inc (CEIX) to acquire remaining public stake in CONSOL Coal Resources (CCR) in a stock-for-stock transaction valued at $34mm (press release)
    • CCR went public in June 2015 in a $75mm IPO of 5.0mm units at $15/unit

Other

  • Martin Midstream (MMLP) disclosed CEO Ruben Martin will retire at the end of 2020 (filing)
  • Summit Midstream (SMLP) disclosed COO Leonard Mallet will be leaving the company at the end of the month (filing)
    • Mallet was interim CEO for several months last year before Heath Deneke was appointed CEO
  • Kinder Morgan (KMI) released 2019 ESG report (press release)
  • The Alberta Government will end oil curtailments at year end (Global News)

Distributions

  • 13 more dividend/distribution announcements this week, no cuts.
  • Ex-dates start to hit next week, expect some volatility around those a week before the election.
  • But for now, flat distributions are being well-received.