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CBRE GLOBAL INVESTORS

CBRE Global Investors, combined with CBRE Clarion Securities and CBRE Caledon, is one of the world’s leading real asset investment managers providing real estate and infrastructure investment solutions to over 500 clients worldwide.

CBRE GROUP

CBRE Global Investors is the investment management division of CBRE Group, Inc. the world’s premier commercial real estate services and investment firm.  The company’s shares trade on the New York Stock Exchange under the symbol “CBRE.”

REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Week Thoughts: Positive Pipeline Performance Pre-Earnings

Midstream bounced back this week, riding a strong market, stable oil prices and the ramp into distribution season.  Utilities had a strong week, which is relevant for Canadian midstream stocks, the largest of which tend to trade more like utilities.  Canada outperformed the U.S. in midstream, pushing AMNA higher and adding the spread in performance vs. U.S. indexes YTD and especially year-over-year.

Even with strong utility performance, transportation stocks within infrastructure led to less strong performance for broader infrastructure this week.  With airport stocks and toll roads challenged by the pandemic and with midstream facing its own challenges, infrastructure has underperformed utilities and the market broadly this year but is far ahead of midstream.

Earnings Incoming

KMI reports 2Q results this week.  The mood in midstream remains uneasy.  Expectations are for 2Q to be the bottom for operating and financial results.  The focus will be less on the quarterly results and more on real-time updates and outlook. 

Opportunities for variation from quarterly expectations should come (1) from the pace of production coming back online after shut-ins early in the quarter, (2) from variances in storage and marketing businesses that may have benefitted more or less in the extreme volatility of oil prices this quarter, and (3) the demand for refined products and exports in the quarter. 

Beyond those potential surprises, the focus will be on current activity levels and on longer-term views of cost reductions, efficiencies, and capital allocation.  The upcoming election will also be a focus as investors grapple with a potential change in leadership, which was highlighted with this week’s release of Biden’s $2 trillion climate change plan.  A larger environmental focus for the government could impact production of and demand for hydrocarbons.  The impact of potential tax reform could also skew performance within the midstream group given some MLPs remain and they still don’t pay taxes.

Waiting on the World to Change

Out here in suburbia, we expect to hear soon the upcoming school year plan.  The mood is hopeful that things can get back to normal and that kids can attend school this fall, but at the same time we are preparing for the probability that at best it will be a mix of in-person and on-line schooling.  Eventually (in 12, 18, maybe 24 months?) school will return to an approximation of “normal”. 

Energy and Midstream investors are waiting for things to get back to normal, too.  The market doesn’t appear to have much hope on that front.  The pace of renewable development, the disdain for fossil fuels in the global community seems to be an overwhelming trend. 

The implication for investors is a new normal that requires a quicker payback and a lower terminal value. For MLPs, it means higher upfront yields to compensate for the market’s reluctance to place a residual value on the infrastructure that’s critical today and could not be replaced in the current regulatory environment.

This new “grand bargain” could mean that midstream yields will remain higher than historical average for longer.

Winners & Losers

MLPs

CEQP was the big positive outlier this week, with help from two catalysts: (1) the administrative stay of the DAPL pipeline shutdown order, pending the appeal for the longer stay, and (2) maintained distribution announced Thursday night.  CEQP traded up 10.0% Friday, an indication that a distribution cut was priced in. 

Other notable winners were DJ Basin exposed names NGL and DCP.  OMP snuck into the top 5, also maybe benefitting from hope in Bakken.  HMLP outperformed, another MLP that announced a maintained distribution.  PAA continues to struggle to find interest within the broader group and was the worst performer.

CEQP went from bottom 5 to top 5.  On the YTD look, EVA extended its lead on the group as the only positive name.  CEQP rallied out of the bottom 5, replaced by CNXM.

Midstream Corporations

In this corporation group, YTD leaders WMB and AM were among the best performers this week on the ongoing not-as-dire Marcellus natural gas outlook.  Bakken-related names OKE and HESM were also among the leaders, likely beneficiaries of some DAPL relief / hope.  Only two negative stocks this week in this group.  The biggest losers this week were PAGP, RTLR and ENLC, all big YTD underperformers that remain unloved.

WMB and AM repeated in the top 5 week-over-week.  RTLR repeated in the bottom 5.  OKE went from worst last week to near the top.  On the YTD leaderboard, AM is now the leader, edging out WMB.  Those two are well ahead of the rest of the group.

Canadian Midstream

Canadian midstream was positive across the board this week and the group on average outperformed U.S. midstream indexes.  In the race between the two big players in Canada, TRP outperformed ENB this week, continuing a recent trend.

Pembina and Enbridge were near the bottom again, with the market continuing to favor TRP.  On the YTD leaderboard, TRP is pulling ahead of the group, down just 14% in USD terms.  IPL is still the laggard, hurt by high leverage and questions on the return profile for the Heartland complex being developed.

News of the (Midstream) World

Light news week.  The administrative stay for the DAPL pipeline was notable, but the market seems skeptical on the regulatory headwinds on that pipe and the sector as a whole.

Capital Markets

  • Equitrans Midstream (ETRN) filed S-3 to register 30.0mm common shares issuable upon conversion of preferred stock offered by selling shareholders (filing)
  • Cheniere Energy (LNG) disclosed that it repurchased $844mm in aggregate principal amount of its outstanding 4.875% convertible senior notes due 2021 and converted 100% of its 11% convertible senior secured notes due 2025 into cash (filing)
    • LNG used its delayed-draw term loan credit facility to fund the purchases

M&A / Growth Projects

  • Williams (WMB) announced FERC approval for Leidy South Project to provide additional pipeline capacity to serve equivalent of 2.5mm homes (press release)
    • Headline and press release included the phrase “clean energy” in the ongoing PR push for natural gas
  • Hess Midstream (HESM) announced a delay to its planned maintenance turnaround of the Tioga Gas Plant originally schedule for 3Q 2020 until 2021 in light of COVID-19 challenges (press release)
    • HESM also reaffirmed 2020 financial guidance, 25% 2021 EBITDA growth, 5% distribution growth through 2022

Other

  • Energy Transfer (ET) was granted an administrative stay while awaiting a ruling on its appeal to keep the Dakota Access Pipeline (DAPL) in-service while the U.S. Army Corp of Engineers conducts the court ordered Environmental Impact review (Reuters)
  • EnLink Midstream (CFO) announced Pablo Mercado as EVP and CFO, effective immediately (press release)
    • Eric Batchelder was CFO since January 2018, when he replaced Mike Garberding
  • Tellurian (TELL) fails to quality for LNG supply, $2.5bn Petronet Memorandum of Understanding (MoU) for purchase of up to 5mm tons per annum of LNG expires (Enercom)
    • TELL’s stock is down 85% year-to-date
  • Hi-Crush (HCR) files for protection under Chapter 11 of the U.S. Bankruptcy Code (press release)

Distributions

  • No distribution cuts so far this quarter
  • CEQP distribution is still +4.2% above last year, trades at 18.5% yield