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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

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Week Thoughts: No Encore, Deck Still Stacked for Midstream

The string of successive positive weeks for midstream ended this week, Midstream stocks were down roughly 1% across MLP and midstream indexes. Canadian Midstream stocks outperformed for the first time in a while. Utilities had a very strong week and the S&P was slightly positive. Oil prices continue to languish, now down 7 straight weeks, while natural gas prices continue to hold firm.

With very little news this week, and little news expected before Labor Day, midstream trading action should continue to reflect positioning changes as investors digested 2Q results and conversations at the Citi conference in Las Vegas this week.

The deck remains stacked in favor of midstream stocks, with production and export demand growth increasing, creating constraints and need for new infrastructure. Financial structures are cleaned up or are on their way there.  Management teams are growing more comfortable with the rhetoric of the new MLP world that is more about returns on capital, not returning to the capital markets.

What Does the Book Say?

In blackjack at a casino, you don’t have to know anything to play. There’s always someone around willing to tell you what “the book” says to do in this situation. The book says what will result in the best outcome in this situation in the long run. With luck you can do better than the book in the short term and walk away from the table with some profits before the statistics catch up to you. It’s about as simple as it gets, so simple in fact that “the book” is really just a card with a chart on the front and back.

It doesn’t have to be complicated for midstream, either. We have blueprints that make for successful midstream companies.  The book these days says simple structures, capital discipline, self-funding is the way to go.

The book for investors says avoid bias and look at the improving numbers. In some cases, the MLP that burned you before and that you sold lower, could be worth another look after an improved outlook and balance sheet.

Along the same lines, a through line from my meetings in Las Vegas that caught my ear: 3 separate MLP executives used the word “overthink”.  This was in reference to different things each time. For example:

  • “Don’t overthink it” – a CEO admonishing a young hedge fund guy asking a super specific question.
  • “Let’s not overthink this” – the new CEO of EQM explaining his philosophy for the soon-to-be independent E-Train (ETRN is the ticker).

So in that spirit, I’ll leave it there this week and pick up with additional thoughts next week.

Winners & Losers

Small MLPs were the outliers among both winners and losers this week, but no real news to point to for any of the moves. DKL, HESM and GLP may have attracted some new fans with positive results a few weeks ago.

No repeats in either direction this week vs last week. On the YTD leaderboard, CEQP is pushing 60%,   ETP moved into 3rd place overall, PAA and GLP displaced HCLP and CQP in the top 5. In the bottom 5 YTD, AMID was the only one to trade up this week.

General Partners & Midstream Corporations

TGE was the sole midstream corporation or GP to trade up this week, likely helped by the chance to explain the Seahorse pipeline development strategy to investors in person this week. ENLC and TRGP also had decent relative weeks.

PAGP and TRGP repeated in the top 5 this week, and both made up some ground relative to OKE on the YTD leaderboard. SEMG and LNG repeated in the bottom 5. On the YTD bottom 5, KMI dropped into the bottom 5, in the spot vacated by TGE.

Canadian Midstream

Canada slightly outperformed relative to US Midstream and MLPs this week, and the group traded within a tight band as usual.  The only two negative performers are two smaller names (Keyera and Gibson) that have recently been active in acquiring and developing assets in the US. ENB outpaced its fellow behemoth TRP again this week.

Canadian Midstream remains negative as a group in USD for the year so far, but after years of outperformance through the Midstream depression cycle, the US catch-up trade makes sense in a recovery.

News of the (Midstream) World

The little news we got this week represented updates to developing stories already in progress: (1) TGE is very active in developing projects, (2) Cheniere is having commercial success with LNG customers, and (3) EQM is having a hard time building MVP.

Capital Markets

  • None

M&A / Growth Projects

  • Tallgrass Energy (TGE) announced open season for crude oil transportation on Seahorse Pipeline (press release)
    • Seahorse is expected to be a 30-inch, 700-mile long pipe with capacity to transport 800,000 bpd from the Cushing to the Louisiana Gulf Coast
    • Commercial operations are expected to begin by Q3 2021
    • TGE also expects to complete pump optimization projects to expand capacity on its Pony Express Pipeline to enable it to transport up to 400,000 bpd by the end of the year
  • Cheniere Energy (LNG) announced a 25-year LNG sale and purchase agreement with CPC Corporation, Taiwan beginning in 2021 (press release)
    • CPC has agreed to purchase approximately 2mm tonnes per annum at a price indexed to the monthly Henry Hub price plus a fee
  • Mountain Valley Pipeline, a JV of ConEd (ED), EQT Midstream (EQM), NextEra (NEE), and RGC Midstream, announced an expected in-service date of Q4 2019 verse prior expectations of Q1 2019 following the modified stop work order issued by FERC (press release)
    • The modification allows construction to restart for 77 miles of the 300-mile route
    • MVP announced it has released as much as 50% of its construction workforce as a result