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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure, CBRE Clarion

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Week Thoughts: Oil Trampled, Midstream Still Standing

Midstream was negative 3 of the 4 days this week and finished down around 3.0% overall, beating the S&P 500 slightly, despite another oil rout.  Canada’s low beta helped the AMNA outperform the AMZ and AMUS this week.  Oil prices were down for a 7th straight week, down 33% from the peak October 3rd, after the latest black Friday. The Alerian MLP Index is down just 12.2% over that time, much better than XLE, the energy sector ETF.  The AMNA has done even better.  Short-term relative outperformance is hard to get excited about, but it’s better than the alternative.

Midstream traded down on negative oil days and positive on the one positive oil day (Wednesday), but the smaller amplitude of the downside moves was encouraging.  Midstream boasts strong earnings and execution evidence, huge progress on eliminating IDRs, improving leverage, high quality growth projects and compelling valuations.  But it’s still a bit too much to ask for midstream to actually trade up in a week when oil drops 10%.

When oil does find a bottom (which it always does eventually), then midstream and MLPs are positioned for across the board resurgence.  Resurgence of interest in midstream, resurgence in fund flows and most importantly, a resurgence of midstream stock prices.  This bullish outlook may ring hollow from someone who manages money in the midstream sector as a career, but we’ve been critical in the past even in the face of falling stock prices.  Midstream’s time in the penalty box is drawing to a close…

Index Whitepaper

I received positive feedback on the index paper we published last week (read more here).  Thanks to those who read all the way through it.  The amount of capital invested in passive and active vehicles that track MLP-exclusive indexes is staggering and over time that capital should migrate to vehicles with broader mandates that are benchmarked to a more inclusive index.  There was some feedback that maybe going with an index that includes Canadian corporations was dilutive to a focus on U.S. energy infrastructure growth, but I disagree.

It seems short-sighted to limit the midstream universe in any way with the dynamic nature of the sector right now.  4% of the Alerian MLP Index will be absorbed by a single midstream company in Canada when ENB completes its merger with SEP and EEP. Canadian midstream comprises $117bn of market capitalization, including 3 of the top 10 largest companies in North American Midstream.  A substantial portion of the assets of ENB and TRP are in the U.S., including several critical oil and gas pipelines networks.  Also, we have seen the benefit of diversification Canada adds to the performance of AMNA vs. AMZ, especially when volatility emerges like the last 7 weeks.

Winners & Losers

The only MLP with material news this week beat all others this week with a 4.7% gain after announcing an asset sale.  APU traded well, probably on colder weather.  SUN also performed well, gasoline retailers tend to have fundamental tailwinds when oil declines.  On the downside, Shipping MLPs dominated the bottom 5 (TOO, TGP, DLNG).

SMLP continues to trade poorly post-earnings, with a second straight bottom-5 performance. On the YTD leaderboard, NRP extended its lead over the rest of the MLPs with a 44.8% total return this year.  The runaway winner earlier this year, CEQP, continues to fall down the leaderboard.

Midstream Corporations & General Partners

U.S. midstream corporations and general partners underperformed MLPs again this week.  ETRN and EQGP continue to show strength, helped by natural gas prices. Another gas focused name, WMB, also traded better than average for a second straight week.  Permian-focused G&P corporations ALTM and TRGP were at the bottom of the group for a second straight week.

And then there were two.  No change in the order of the top or the bottom 5 on the YTD leaderboard, but its notable that there are just two positive performers in the group at this point (OKE and LNG).

Canadian Midstream Corporations

Canadian midstream outperformed U.S. corps and MLPs again this week, proving to be more defensive in the last month, despite Canadian oil prices quoted in the mid-teens.  Big cap names led the way again this week.

TRP beat the rest of the group for a second straight week, showing impressive follow-through after the analyst day.  On the YTD leaderboard, returns across the group remain tightly bunched outside of the two outliers at the top.

 

News of the (Midstream) World

Sleepy week of news, a little too sleepy…

Capital Markets

  • None.

Growth Projects / M&A

  • Natural Resource Partners (NRP) agreed to sell its construction aggregates business segment for $205mm to an affiliate of Sun Capital Partners (press release)

Other

  • AltaGas (ALA-CA) appointed Randall Crawford as CEO, effective December 10 (press release)
    • Crawford’s most recent role was SVP and President, Midstream and Commercial with EQT, where he was heavily involved with EQM and EQGP