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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Pipelines Piping, MLPs A-Leaping

Midstream’s bounce off the bottom continued this week.  In basically a repeat of last week, the MLP Index gained 4.6% the first three days of the week and was flattish from Wednesday’s close through the end of the week.  Helping the sector sustain last week’s rate of gains was the announcement of a sweetened deal for Tallgrass Energy (TGE), and a positive market backdrop.  MLP Index is now up more than 10% off the bottom and the total return index is back to early November levels.

Back-to-back 4% return weeks is very rare for the MLP Index.  The last time it happened was the first two weeks of 2018 (about two years ago).  The only other time it happened was in the two weeks after the downdraft associated with the week of 9/11/2001.  Today’s MLP Index includes less of the overall midstream sector than at any point in the last decade, so the comparability of volatility today to prior periods is limited.  The AMNA being up 3% for consecutive weeks is also quite rare, having happened only 4 times in the last 6 years of AMNA history. 

Reflectivus for the Rest of Us

There are just 6 trading days and only one more full weekly post left in 2019.  I thought it would be fun to reflect on some of the highlights for the year. 

My Favorite Posts of 2019

My Favorite Analogies

  • “Un-Navigable Midstream” August 11th
    • The analogy: Being in a kayak when the water under your boat becomes too shallow to propel you and you have to carry it for a ways.
    • The idea is that MLPs are challenged by lower fund flows, a constant theme this year.
    • “Things have ground to a halt once again. Long-term midstream investors must get out and carry their kayaks to the next point of navigable waters. I’m not sure what changes the current situation, some of it may be seasonal, some of it cyclical and certainly some of it feels structural. None of it feels good.”
  • “Midstream Trypophobia” December 7th
    • The analogy related to the fear of holes and how once you acknowledge that fear, holes become all you can see
    • I wrote this post highlighting how the market seemed incapable of seeing past the challenges faced by MLPs.
    • Since that post, tax-loss selling abated and MLPs have taken off.

My Favorite Title: “MLPs Less Travelled” October 26th 

  • It was the theme of that particular week and of the year.
  • MLPs were hit hard by a fund flow situation that overwhelmed their stocks relative to the market and to others in midstream.
  • My contention is that theme will continue to play out over the next several years, with less of an impact over time.

Most Popular Posts

  • “MLPs sell-off On-Purpose” September 28th 2019
    • I assume the catchy title and the general negative price action in midstream that week attracted interest
    • The “On-Purpose” referred to a phrase EPD says when talking about their PDH plans (producing propylene on-purpose)
    • The basic message was investors appeared ambivalent to MLPs announcing more development projects (like EPD with its PDH plant)
  • “Midstream, So Hot Right Now” January 12
    • The second most popular video this year was from the second week of the year
    • The strong start to the year is likely the reason for this post’s popularity
    • In this post, I highlighted it was the best 6 day start of any prior year

Winners & Losers

MLPs

EQM posted double digit returns for a second straight week to lead midstream MLP performance, helped by the guidance announcement early in the week that indicated distributions would be maintained through 2020.  PSXP rallied hard on no news. 

NS repeated in the bottom 5 this week.  On the YTD leaderboard, PSXP’s huge move this week pushed it well ahead of the group for the overall lead with more than 58% return this year.  USAC and EVA also gained ground and are in the running for top non-midstream MLP honors for the year.

Midstream Corporations

Naturally, TGE led all midstream corporations in performance this week, after the announcement earlier of a sweetened takeout bid from sponsor Blackstone.  AM, ENLC and ETRN each posted another double-digit week of gains as they make a late push to finish down less than 30% for the year, respectively.  ENLC was helped by Devon’s Barnett Shale asset sale (ENLC services the assets).  AM was helped by disclosure of relatively low price for the shares bought from AR. 

While not in the top 5 this week, WMB and TRGP had strong returns among the larger names.  LNG continues to lag the latest midstream rally, KMI and OKE repeated in the bottom 5.

On the YTD leaderboard, TRGP return is above 20% and WMB is approaching 15%, while OKE and KMI are comfortably ahead at more than 40% each.  The bottom 2-4 has become a heated race between ENLC, ETRN and AM.

Canadian Midstream

Overall positive week for Canadian midstream, with a tight grouping of performance in the 1-4% range.  TRP was the overall leader for the week and continues to push higher on the YTD leaderboard, joining GEI above 50% return.

On the YTD leaderboard, now that KML has closed and will be removed from the chart next week, the surviving Canadian midstream stocks will each have produced greater than 30% total returns in USD in 2019.  Pretty incredible run.

News of the (Midstream) World

One big news item, and a few loose ends tied up heading into what hopefully will be a quiet few weeks.

Capital Markets

  • Antero Midstream (AM) disclosed completion of their $100mm share repurchase from Antero Resources at average price of $5.16/share (filing)

Growth Projects / M&A 

  • Blackstone Infrastructure Partners announced increased takeout price for remaining outstanding units of Tallgrass Energy (TGE)
    • Price increased to $22.45/share from original offer of $19.50/share made on August 27, a 15% increase (press release)
    • New offer was a 22.7% premium to prior day close
    • Transaction is expected to close in 2Q20 and TGE has agreed not to pay distributions from now until close
  • Gibson Energy (GEI-CA) announced a one-million-barrel expansion at Hardisty Terminal which will be placed into service by the end of 2020 (press release)
  • Enbridge (ENB-CA) filed regulatory application in support of contracting its Mainline Pipeline System (press release)
    • Base toll from Hardisty to Chicago of $5.70/bbl with discounts available that could reduce toll down to $5.11/bbl
  • Pembina (PPL-CA) announced closing of the Kinder Morgan Canada (KML-CA) acquisition (press release)
    • Transaction was announced on August 21
    • KMI now holds shares in PPL
  • Producer Gulfport (GPOR) announced sale of water infrastructure to Bison (press release)
    • Total purchase price potential of $100mm, including $50mm up front and ability to earn additional $50mm over time
    • Transaction included 15-year agreement with Bison