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.
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.
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.
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 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.
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.
M&A / Growth Projects