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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

Week Thoughts: Oil Drops, IPO Pops

Rough week for oil and energy stocks, but for midstream stocks it wasn’t terrible.  MLPs (-1.1%) were down in-line with the S&P 500 on the week, a big win relative to energy stocks more broadly (XOP -8%, XLE -3%).  Utilities were strong, helped by U.S. 10 year interest rates hitting YTD lows.

WTI oil prices had their worst daily decline this year (-5.7%) on Thursday, closing the day below $58/bbl.  Weakness came from economic growth concerns and “risk-off” trading.  MLPs were down 2.1% Thursday, sparking some flashbacks for midstream investors who remember days when midstream would be crushed on volatile, risk-off days.  This week had the most equity capital markets activity of any week so far this year, which makes the relative strength for midstream all the more impressive.  

ECM Desks Rejoice

News this week was dominated by equity capital markets for the first time in a long time.  The first IPO in midstream since BP Midstream in October 2017 priced this week.  Similar to when Dominion Midstream went public in October 2014, RTLR traded through a nasty energy tape to finish with a substantial IPO pop of nearly 10%.  Also trading well in the aftermarket was a large block trade by holders of AM. 

These are small but positive data points.  The cynical view would be to fret about who might issue equity next and which company might soak up fund flows into the midstream sector, neutralizing any new fund flows. An acceleration of equity issuance doesn’t seem likely given the promises made by management teams across the sector.  But re-establishing functioning equity capital markets should be a pre-requisite, a box that needs to be checked at some point if the sector is to have a sustained recovery. 

Midstream Compensation Review

The long weekend seems like a good time to share some midstream compensation data I recently compiled.  Many of the sponsored MLPs are paid by their financial sponsor and not directly by the MLP.  That is the case for PSXP, MPLX, HESM, HEP and several others. 

Of the MLPs that have named executives that are paid by the MLP, the top 10 highest and lowest salary CEOs are listed below.  I included ET on both lists, because president Mackie’s number was so high, and CEO Kelcy Warren’s was so low.  It is notable that many midstream CEOs (like Warren) own a substantial number of units or shares upon which they receive quarterly distributions.  Richard Kinder was the pioneer of the low compensation, high insider ownership setup. 

Among the highest base salary midstream CEO’s, most are as you would expect.  They are the biggest and most prominent companies in the sector.  The one exception is Global Partners (GLP) CEO Eric Slifka who has a higher base salary than MMP’s Mike Mears and the same as OKE’s Terry Spencer despite running an MLP that is a fraction of the size of the other names on this list.

A few other general notes on compensation:

  • No executive at KMI earns a base salary of more than $400k
    • Everyone in the ET named executive list other than Kelcy Warren had a base salary of $500k+
    • Everyone listed for WMB and BPL had $500k+ base salaries
  • Jennifer Kneale is among the lowest paid CFOs and had the lowest base salary of any of TRGP’s named executives
  • GLP CEO Eric Slifka had the biggest base salary per dollar of market capitalization
  • Executives at companies with less than $10bn market cap with generally low ratio of market cap. to base salary: TGE, EQM, ENBL, TRGP, ENLC
  • I didn’t include any analysis of upstream MLP management compensation, but there has been some lively discussion of the subject on Twitter regarding recently disclosed details of LGCY’s compensation by a former Enron executive parody account

Change of Control Review

Finally, I thought it would be fun to list the CEOs with the biggest change of control payments.  The table below highlights the 7 midstream executives with change of control provisions greater than $10mm.

Winners & Losers

GEL outperformed all other MLPs this week, getting a MEI Conference bounce and maybe some support due to wider Canadian differentials, supportive of crude-by-rail economics.  The rest of the top 5 were sponsored MLPs, perhaps benefitting from what appears to be an improving equity capital market for MLP issuers. 

On the downside, higher beta names with exposure to commodity prices or volumes that are sensitive to commodity prices underperformed.

SMLP repeated in the bottom 5, BPMP and SHLX repeated in the top 5 this week.  On the YTD leaderboard, SHLX joined the top 5.  On the downside, SMLP is closing the gap with MMLP in a race to be the worst performing MLP of the year.

Midstream Corporations

RTLR was the best performer of all taxpaying and non-taxpaying midstream companies this week.  U.S. corporations as a group, however, underperformed MLPs this week.  TGE and KMI had relatively strong weeks, while more commodity or volume sensitive names like ALTM, ENLC and TGE underperformed.

LNG repeated in the bottom 5 this week, and it seemed to trade poorly after Sempra’s announcement of an LNG offtake agreement with Saudi Aramco.  On the YTD leaderboard, everyone was down this week, but ENLC’s outsized weakness dropped it two spots to 5th place.

Canadian Midstream

The largest Canadian corporations outperformed this week, led by TRP.  Smaller, generally higher commodity price sensitive names under-performed.

KML and IPL were underperformers for a second straight week.  ENB passed GEI and continues its climb up the YTD leaderboard. 

News of the (Midstream) World

Outside of capital markets, there was news among a few penny stock MLPs: a take-under of a shipping MLP by its private equity sponsor and a corporate conversion approval by a frac sand MLP.  The long tail of minor MLPs continue to whittle down, which is healthy for those who remain.

Capital Markets

  • Rattler Midstream LP (RTLR) priced IPO of 38.0mm common units at $17.50/unit, raising $665.0mm in gross proceeds (press release)
    • RTLR is a subsidiary of Diamondback Energy (FANG) and owns and operates crude oil and natural gas midstream assets in the Midland and Delaware Basins of the Permian
    • FANG will own 75% of LP interest in RTLR, or 71% if the underwriters exercise in full their option to purchase an additional 5.7mm units
    • IPO was upsized from 33.3mm units originally offered
    • $17.50 price represents 5.7% yield based on the initial distribution
    • Priced at the midpoint of the filing range, and closed up 9.9% from pricing on its first trading day
  • Owners of Antero Midstream (AM) shares, private equity firms Warburg Pincus and Yorktown, sold 19.0mm shares of AM in a block trade at $13/share, or $247mm
    • Priced at 2.0% discount to prior closing price, traded up 3.4% from pricing the next trading session

Growth Projects / M&A

  • Sempra (SRE) and Saudi Aramco announced they have signed heads of agreements (HOA) for the negotiation and finalization of a definitive 20-year LNG sale-and-purchase agreement for 5 Mtpa of LNG offtake from Phase 1 of Port Arthur (press release)
    • HOA also includes a negotiation and finalization of a 25% equity investment in Phase 1 of Port Arthur
  • Kinder Morgan (KMI) announced binding open season for additional capacity of SFPP system (press release)
    • The expansion will provide 7,500 bpd of incremental capacity for the transportation of Mexican-grade gasoline and diesel from El Paso, TX to Tucson, AZ
  • Teekay Offshore (TOO) announced receipt of an unsolicited non-binding proposal from Brookfield to purchase all remaining equity not owned by Brookfield for $1.05/unit in cash (press release)
    • $1.05/unit represented a 9.5% discount to the prior day’s closing price of $1.16/unit
    • Brookfield owns a majority position in the G.P. of TOO and more than 60% of the outstanding units, acquired in a series of transactions dating back to July 2017

Other

  • Hi-Crush Partners LP (HCLP) unitholders approved conversion to a corporation to be re-named Hi-Crush Inc. (HCR) (press release)
    • HCR will be listed on the NYSE beginning on June 3